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    North Sea Entering Unchartered Waters: WoodMac


Operators can slash operating spending in the short term, but longer term they will need to invest to boost production and reduce unit costs.

by: Joseph Murphy

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North Sea Entering Unchartered Waters: WoodMac

The North Sea oil and gas sector is entering "unchartered waters" following the collapse in oil prices to $25-30/b, Edinburgh-based Wood Mackenzie said in a research note on March 23.

"In the short-term, the North Sea can survive. Cost reductions achieved during the last downturn mean 95% of onstream production is ‘in the money’ at $30/b," WoodMac upstream analyst Neivan Boroujerdi estimates. "But close to a quarter of fields will run at a loss in this price environment. The major concern here is not volumes. Early shut-ins would accelerate $20bn in decommissioning spend."

Operators will need to slash operational expenditure in the short term, but over the longer term they will need to keep investing in order to ramp up production and reduce unit costs, WoodMac said. "If the industry goes into harvest mode, a premature end is inevitable," it said.

The consultancy estimates that the majority of final investment decisions (FIDs) planned for 2020 will not take place, and at current prices, two-thirds of development spending could be removed from WoodMac's forecast over the next five years.

Annual UK investments could dip below $1bn as early as 2024, making the risk of stranded assets very real. Almost 6bn barrels of economically viable oil could be left in the ground, as well as an addition 11bn in contingent resources.

However, "short-cycle, strategic tie-backs are still likely to go ahead," Boroujerdi continued. "About 3bn of the 6bn barrels of economically viable resources break even below $50/b; further cost reductions or a price recovery could quickly make them viable again."

This said, major cost reductions from the service sector are unlikely, with demand falling and suppliers deciding or being forced to scale back in response. Operators will need to revisit their development plans to achieve savings.

The North Sea's traditional players may be reluctant to invest, however, with majors scaling back capital spending and the sector's independents struggling financially. And the prospects of new entrants is not looking likely. When the price collapsed around 2014, private equity-backed firms swooped in to acquire assets cheaply, helping to inject fresh capital into the sector. But history might not repeat itself, given the failure of the new entrants to exit quickly.

"Could private equity come to the rescue again? With several unmonetised vehicles already on the shelf, a new wave of money is not certain. What was already looking like a difficult exit story just got a whole lot harder," Boroujerdi said. 

The outlook is more positive in Norway, where more than 60% of investment comes from locally-focused players with strong balance sheets, WoodMac noted. But the recent wave of FIDs cover projects which need Brent at $40/b to generate positive cash flow.

"At a time when there is public pressure to move towards more a 'greener' energy mix, it’s hard to see governments easing the fiscal terms," Bouroujerdi said. "Long term, the energy transition needs to accelerate but there’s a risk of short-term stagnation. For the companies that survive, they will need to adapt to a greener future."

Operators across the world are making dramatic cuts to their capital expenditure, in response to Covid-19's impact on demand and the expectation that Russia, Saudi Arabia and other Opec+ countries will ramp up production over the coming months after ending their co-operation.