UK Offshore Sees Capex Commitment Shrink
The UK Continental Shelf (UKCS) has seen a brisk wave of mergers and acquisitions over the year with almost $6bn notched up since January, as low prices bring out new capital able to make money where the incumbents cannot. And this year's Offshore Europe conference in Aberdeen was described by several attendees as buzzing.
Nevertheless, the latest economic report by the offshore industry lobby group Oil & Gas UK (OGUK), published September 6, contains plenty of discouraging data. The lag between investment decisions and their results means that since 2014, when oil prices fell, oil and gas output has gone up 16% and over the same period, lifting costs have almost halved.
But cuts in capital expenditure since 2014 mean that very little new is planned. Exploration and appraisal wells remain a serious concern with UKCS drilling at record lows, and only three new field approvals were sanctioned since the start of 2016.
If activity does not pick up this could have further negative implications for jobs that could threaten core capabilities, the report says. More assets need to be developed, but cannot be sold as their tax history is not transferable. This creates a negotiating deadlock for the buyer and seller, postponing the injection of new capital.
However, the fact that assets are changing hands as new kinds of companies see value does suggest that the UKCS may start to benefit from a badly needed investment boost, the report says. OGUK believes that its efficiency gains, fiscal competitiveness and world-class supply chain differentiate it from other basins.
While investors still want more certainty over Brexit and clarity over the role of oil and gas through a more comprehensive energy policy, the transformation underway is restoring the UK’s position as an attractive basin for investment – and one still supporting over 300,000 UK jobs, it says.
The challenge now is to ensure this renewed interest in the basin translates into tangible activity that could help unlock around £40bn ($52bn) worth of potential development opportunities known to be in company business plans.
OGUK CEO Deirdre Michie said: “There are still serious issues facing our industry which has suffered heavy job losses since the oil price slump. But we are hopeful that the tide is turning and expect employment levels to stabilise if activity picks up. Our sector is successfully re-positioning through efficiency and cost improvements.... We are increasingly being seen as a much more attractive basin in which to invest with further M&A activity expected over the remainder of this year and into the next.
She also said that government can continue to play its part, by developing a clear energy policy that reinforces the role for oil and gas in the Industrial Strategy, supporting a Sector Deal and confirming in the Autumn Budget that decommissioning tax relief will be modified to support further investment activity.
Industry and the finance ministry have been working this summer on a way to allow the transfer of tax history from seller to buyer, and so facilitate asset sales.
“It’s vital that industry and government work together to secure our future. There are billions of barrels of oil and gas still to go after in our own back yard. Government and industry must make the most of the opportunity offered by our sector.
Commenting on the new optimism, Deloitte said the UKCS has cut operational costs and a significant uptick in merger & acquisition activity across the sector gave rise to a new confidence. "Assets are finding their way into the right hands and a new cohort of private equity-backed businesses is breathing new life into the basin," it said.
The CEOs of both Shell and BP told the Offshore Northern Seas conference in Aberdeen September 5 they believe there is much more oil and gas to be produced from the UK North Sea but called for new fiscal incentives and ongoing efficiency improvements.
BP CEO Bob Dudley remarked in his speech: "In this tough environment, we see the North Sea turning things around. Costs are coming down and oil production is back up. There is plenty of life left in the basin, but it has never been a basin of easy barrels – even less so today after 5 billion barrels of production. We have to be highly competitive, cost-efficient and disciplined, and then a step beyond that."
William Powell