Confidence falls in the North Sea oil and gas industry

Declining production levels and falling oil prices hit confidence in offshore sector particularly the North Sea

Andy Buchanan/PA Wire An oil rig in the North Sea
An oil rig in the North Sea

Confidence has fallen to a six year low in the North Sea oil and gas industry amidst calls for the Government to provide urgent support in next week’s Autumn Statement. Peter McCusker reports.

Declining production levels, record low exploration levels and falling oil prices – combined with rising costs - are producing a pernicious cocktail of uncertainty on the United Kingdom Continental Shelf (UKCS).

One of the oil and gas industry’s most respected industry surveys highlights these fears, with the North Sea’s major operators and contractors reporting plummeting optimism.

The findings, from the 21st bi-annual Oil and Gas Survey, conducted by Aberdeen & Grampian Chamber of Commerce and sponsored by law firm Bond Dickinson, reveal that for the first time since 2008, more operators and contractors are pessimistic about their UKCS activity than they are optimistic.

The survey of firms, representing around one-sixth of the industry, shows that 15% of businesses are more confident than a year ago, while 46% are less optimistic.

The findings tally with Oil & Gas UK’s investment analysis which shows spending reached a record-breaking £14.4bn last year and while it is likely to hit £13bn in 2014, if there is no change in industry dynamics it could halve by 2016.

This worrying situation has led to renewed calls for additional Government support to ensure all is done to secure the remaining reserves in the North Sea and boost the nation’s energy security.

A North Sea oil rig
A North Sea oil rig
 

Almost two-thirds of all firms surveyed (62%) believe the Government’s top priority for the sector should be a revision to the tax regime to encourage exploration and extraction.

Uisdean Vass, oil and gas partner at law firm Bond Dickinson, said: “This survey provides a stark warning for the Government. Confidence is at its lowest since 2008. Costs are making exploration and production in the UKCS, relative to other petroleum provinces worldwide, increasingly less economical, and exacerbated by low oil prices and high tax rates ranging from 62% to 81% paid by producers in the UKCS.

“It is vital that a high level of activity is maintained in the North Sea because, as well as its direct importance for employment and the economy, it is a testing and training ground for personnel and technology which are exported around the globe. Not addressing problems now could mean thousands of jobs will be lost to Scotland in the years ahead.”

George Rafferty, chief executive of Durham-based NOF Energy which represents hundreds of the region’s supply chain companies, said: “North Sea resources are integral to the UK economy. Its substantial contribution to the UK’s balanced energy mix, the tax paid to the Treasury and the hundreds of thousands of jobs the industry supports means that the sector has to remain a priority for Government.

“The Chancellor has demonstrated he understands the requirements of the sector when he introduced the Brown Field Allowance in 2012, but the future tax regime has to be more in-line with the evolving challenges of the industry.

“Encouraging exploration and extraction, alongside maximising recovery from mature fields, through a fit-for-purpose tax system will enable operators and contractors to follow through on their investment programmes, which will be supported by the country’s skilled and resourceful supply chain.”

Despite the current hiatus, analysts say oil and gas will still be the world’s primary energy source in 2030, with demand projected to increase by almost 50% to support global growth and industrialisation.

This projection is reflected in the survey, with 72% of all international contractors working at, or above optimum levels, up from 42% in June 2014’s report.

Danny Lawson/PA Wire An oil rig in the North Sea
An oil rig in the North Sea
 

Iain Pritty, managing associate in the Newcastle office of Bond Dickinson, works with some of North East’s leading oil and gas supply chain companies.

He said: “Many of the North East companies look to overseas markets and many of these are continuing to grow as the survey’s findings indicate.”

Costs in the North Sea have risen sharply over the few years as most of the easier to recover fields are close to being exhausted and smaller, more technically challenging fields are opened up.

Mr Pritty added: “The operators and contractors have been particularly cost conscious over the last six months and this is providing opportunities in the region.

“They are looking to the North East supply chain companies for products and services, with the region having the skills, technical capabilities and a lower cost base than Aberdeen.”

Many had hoped the Scottish Referendum outcome would have led to a confidence boost but the survey finds it had little impact on almost 80% of those who responded

While wage growth has fallen back from 6% a year to 3% it is still well above the national average, and in the last year the majority of companies have increased staff headcount.

Although most operators see this trend changing over the coming months, amidst reports the bigger companies such as BP, Shell and ConocoPhillips are set to announce job losses.

An oil rig in the North Sea
An oil rig in the North Sea
 

Earlier this year Sir Ian Wood produced his Government commissioned report into the future of the oil industry.

It reported that as much as 15 to 24 billion barriers of oil equivalent (boe) remain on the UKCS, with some 40 billion boe already taken.

He recommended the appointment of new oil and gas authority to ensure these reserves can be recovered.

His report set out some clear guidelines to achieve this, including greater collaboration between North Sea operators.

Robert Collier, chief executive of Aberdeen & Grampian Chamber of Commerce said: “Although confidence levels are at a six year low, the industry has a clear idea of what it needs to do following the studies chaired by Sir Ian Wood.

“Others have noted the contradictory evidence, with investment still planned for the next few years, licencing rounds continuing to attract investment, firms investing in new offices, but exploration at very low rates and the price of crude casting its dull light on the cost base in the basin.

“The £35bn UK oil and gas supply chain needs the UKCS as a platform to build on growing export success. We need the UKCS to retain UK employment, test technologies and new ways of working, and retain the supply chain cluster strength as well as experienced operators.”

The 118 meter oil and gas platform makes its way down the Tyne towards the North Sea
The 118 meter oil and gas platform makes its way down the Tyne towards the North Sea
 

North East chamber of Commerce policy and research manager Mark Stephenson said: “The oil and gas sector is a huge source of economic activity not just in the UK - with its £35bn supply chain - but in the North East where it is responsible for 65,000 jobs.

“The Government can and should take steps to ensure that investment in this sector isn’t driven abroad unnecessarily given the crucial income it provides for UK Plc.”

Earlier this year Chancellor George Osborne launched a widespread review of the North Sea tax regime, acknowledging the concerns of industry and in next week’s autumn statement he is expected to unveil the Government’s ruminations on this issue.

Mr Rafferty added: “Confidence can also return through greater collaboration between government and the industry. The recommendations made in the Sir Ian Wood’s report lay out a clear roadmap for the continued success of the industry and how the Treasury, operators, contractors and the supply chain can benefit from a more cohesive, flexible and collaborative industry.

“The new Oil & Gas Authority, introduced by Government following the Wood Review, has to hit the ground running when it is officially launched in April 2015, but in the meantime, the Government has to adopt the positive principles it expects of the OGA to ensure the industry can be reassured it can operate in a favourable political and financial environment.”

Follow Peter McCusker on Twitter @mccusker60

Journalists

David Whetstone
Culture Editor
Graeme Whitfield
Business Editor
Mark Douglas
Newcastle United Editor
Stuart Rayner
Sports Writer