North Sea oil digs deep for routes to recovery
With decommissioning expertise, new oil finds, and a renewed appetite for investment, has the North Sea turned a corner? Jeremy Cresswell reports
For two years and still counting the UK Continental Shelf (UKCS) has been enduring possibly the roughest ride of any oil and gas province in the world.
Capital investment and operating expenditure have plummeted in response to the longest oil price downturn in the history of this energy province. Total expenditure on the UKCS fell to £17.2bn in 2016 from a peak of more than £26bn in 2014, with further falls forecast.
Of more than 440,000 jobs lost in the industry worldwide, more than one in four have been in the UK, according to Houston-based consulting firm Graves & Co.
Last year, only two new field development plans were approved, with less than £500m of associated capital, according to trade body Oil & Gas UK’s 2017 Business Review, just published. Similarly, there has been little new brownfield investment, reflected in the fall in development drilling by a third last year.
Significant asset deals
The average dated Brent oil price fell by a further 17 per cent last year to $43.7 per barrel (bbl), from an average of $52.5/bbl in 2015. The beneficial impacts of hedging also further waned, leaving operators increasingly exposed although the weakness of the pound has mitigated this.
However, there is growing evidence to suggest the North Sea has turned a corner, thanks in no small measure to efforts made by the industry to re-engineer itself, the raft of fiscal concessions secured over the past few years and the new OPEC accord on production.
The UKCS has seen two very significant assets deals: Siccar Point’s up to $1bn acquisition of OMV’s UK North Sea business (in November) and Shell’s $3.8bn sale of former BG Group assets to UK independent Chrysaor. Shell acquired BG Group in 2015.
Jill Reid, partner (energy and utilities) with law firm Maclay Murray & Spens LLP, said: “Recent M&A activity signals a vote of confidence for the future of the UKCS, but to be internationally competitive the industry must overcome numerous obstacles, including uncertainty in oil price and wariness of investors."
Do forecasts show positivity on the horizon?
Reid was referring to measures introduced in chancellor Philip Hammond’s spring budget. In particular, a statutory instrument extending the definition of investment expenditure to certain categories of operating and leasing expenditure has been laid in parliament. The benefits of the extension are backdated, to cover any allowable expenditure since 8 October 2015.
Meanwhile, Oil & Gas UK forecasts that the number of new field approvals should increase this year, bringing a possible £1bn or more of fresh capital to the UKCS, with more under consideration for 2018 and 2019.
Positivity is creeping back into oil capital Aberdeen, with high-tech ultrasonics company Sonomatic predicting 200 new jobs over the next two to three years. Exploration and production companies may also see – for the first time since 2013 – a collective return to positive cashflow.
The need for cultural change
Oil & Gas UK reports signs of improving capital efficiency, too. It says: “The development costs of new projects being sanctioned are now averaging half those approved in 2013, and are expected to fall further in 2017… the adjustment has been painful, resulting in significant job losses and average supply chain revenues falling by over 30 per cent in the last two years.”
All good then? Not entirely. Research by the Oil & Gas Authority (OGA), the North Sea regulator, finds problems with the industry’s culture and behaviours. The OGA analysed 58 major projects over the past five years: since 2011, fewer than 25 per cent of developments have been delivered on time and budget.
According to the OGA there needs to be: real leadership, agility and a sense of urgency; competence and capability; devolved decision making, accountability, authority and autonomy; a “best answers win” approach; and respect, integrity and trust.
A North Sea renaissance?
Although North Sea decom is being touted as the next great business opportunity for the domestic supply chain, perhaps a renaissance of the UKCS is at hand.
AIM-listed junior Hurricane Energy’s West Shetland discovery is the largest made by anyone in decades; and in the Southern North Sea, BP/Perenco are at last drilling for deep gas. These are potential game-changers.
However, Maclay’s Jill Reid is cautious: “Increase in drilling activity in Norway may be indicative of a positive future for the UKCS. However, this success may be due to a more stable and competitive tax regime, which reinforces the need for the industry to continue with its proposed fiscal changes in the UK.”
More deals to come?
What implications does the state of the oil and gas sector have for deal flow? The OMV-Siccar Point and Shell-Chrysaor deals indicate that the industry may be regaining its appetite for mergers and acquisitions.
A combination of controlling contractor rates and more efficient practices – consolidating the number of types of components used in operations, for example – have confounded the more doom-laden forecasts.
Read the full version of this article in the April 2017 edition of CA magazine