Were the North Sea’s oil and gas industry not already depressed enough, the latest results from an annual survey of the sector, revealed in Aberdeen this morning, will surely ensure it’s descent into sclerosis.
Attendees at the launch of Oil & Gas UK’s 2016 Activity Survey in Aberdeen this morning were told that the industry "is at the edge of a chasm," and that it has yet to feel the full impact of US$30/bbl oil.
Despite having cut operating costs by a third, from $29.3/bbl to $20.95/bbl in 2015, with 2016 look set to drop to $17/bbl, cost reductions have not kept pace with the falling oil price, which averaged $99/bbl in 2014, plunging to $52/bbl in 2015 and could average $40/bbl, according to the most optimistic, in 2016.
This year the UK’s upstream industry is expected to approve less than £1 billion to spend on new projects, compared to a typical £8 billion per year in the last five years, resulting in little by way of new contracts and work for already work-starved contractors.
UK North Sea exploration remains at an all-time low with no sign of improving, according to the survey. 2015 saw production in the basin increase for the first time in 15 years, by 10%, and is set to increase to 1.7 MMboe/d by 2017. Yet, despite the 2015 increase, revennues fell by 30%. At $30/bbl, some 43% of UK North Sea fields are operating at a loss - and that's not including general expenses and financing costs. And the outlook isn't much better. If the current low activity levels continue, production is set to halve between now and 2025.
It was estimated back in September 2015 that some 65,000 jobs had been lost from the industry, which had employed more than 400,000 people. Worryingly, Adam Davey, an economist for Oil & Gas UK, told this morning's event: "The effect of the oil price fall has yet to be fully felt by the industry. The maturity of the basin [also] means the price fall is being felt harder than before."
It's enough to make you want to call the Samaritans, commented Global Energy Group's Terry Savage, during a question and answer session this morning. "I keep hearing people saying 'we've been here before.' We have never been here before, this is totally different and when ever we come out the other side the industry is going to be totally different."
The situation has sparked fears for the long term future of the industry and calls for support from the UK Government. Oil & Gas UK says the government needs to make urgent reforms of the taxes paid by producers in order to attract investment back into the basin and minimize loss of capacity during the downturn.
A UK City Deal fund worth about US$358.4 million was announced last month, to invest in Aberdeen’s future, including an energy innovation center, diversification for the oil industry and a possible expansion of Aberdeen harbor. The Scottish Government also pledged £24.5 million in support for the North Sea oil and gas industry, towards research and development as well as retraining. But the cash is a drop in the ocean.
Oil & Gas UK’s CEO Deirdre Michie said: “The UKCS is entering a phase of ‘super maturity.’ While the industry’s decades of experience provide great depths of knowledge and expertise which can be applied to recover the still significant remaining resource, the report highlights the challenges that the falling oil price poses in our capability to maximize economic recovery of the UK’s offshore oil and gas.”
Whilst success per exploration well drilled in 2015 was the highest for 10 years, the rate of exploration for new oil and gas reserves remains at an all-time low. Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, and as few as 7-10 exploration wells and 6-9 appraisal wells are forecast to be drilled this year.
Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further this year to around £9 billion.
Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100, says Oil & Gas UK. Reserves reported by companies for potential future development have fallen from 10 billion to 8.8 billion boe, as projects are deemed uncommercial in the current environment.
Michie continued: “The basin has to compete fiercely in the global market to attract price-constrained capital to the UK. A coherent approach by the industry, regulator and Government will be critical to boost the industry’s competitiveness and its investors’ confidence.
“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here. It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.
“The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying PRT). A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform. This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years. Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”
Michie concluded: “We have a huge task ahead but the prize is worth fighting for. The UK Continental Shelf still holds up to 20 billion boe, which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”
The UK’s oil and gas industry is its largest industrial sector, contributing around £19 billion in gross value added in 2014. As of 2014, the industry was estimated to support around 375,000 jobs across the economy.
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