Falling oil price presents opportunities to North East firms

With the oil price falling sharply and the majors looking closely at expenditure plans, industry experts say North East supply chain companies should hold their nerve – and take advantages of the new opportunities on offer

Ian McClelland Photography Ltd George Rafferty, chief executive of NOF Energy
George Rafferty, chief executive of NOF Energy
Even before the recent oil price slump of 25% the industry’s main operators were refocussing their efforts on cutting costs and improving shareholder value.

Now that Brent Crude is hovering around $80 a barrel this trend is being exacerbated with the quest for improved value the prime consideration.

One of the region’s most senior industry figures says the falling oil price has led to a reality check for North Sea operators.

Andrew Hodgson, chairman of industry body Subsea North East and chief executive of SMD of Wallsend, relayed a candid assessment of the recent record levels of expenditure, which touched a whopping £14bn last year.

“I was recently talking to a major player and he was saying the industry has had too much money, and has not been facing some of the technical challenges.

“They’re now looking at innovative companies such as the members of Subsea North East to take some of the costs out of the industry,” said Mr Hodgson.

George Rafferty, chief executive of Durham-based NOF Energy, also believes the more stringent fiscal environment plays into the hands of innovation.

He said: “Fluctuations in the oil price does impact on investments and operations in the industry, however, this current lower price shouldn’t prevent supply chain businesses from driving their operations forward as there are still considerable opportunities to exploit.

“That said, the industry, particularly in the North Sea is experiencing a drive towards cost reduction, which will always be accelerated by a drop in the oil price. 

“Perversely, this does however offer real opportunities for supply chain companies that can support operators and contractors looking to control costs by delivering innovative and highly-effective solutions.

“It’s also worth noting that, even without oil demand growth, new wells will need to be drilled worldwide each year to overcome the natural decline rates of existing fields. It is estimated that around 80,000 wells will be developed in 2014 and more as demand grows again, which will increase demand for skills, products and services from the supply chain.”

At this stage in the cycle the North Sea operators have not yet called time on their multi-billion pound expenditure plans, but are looking very closely at costs.

Last week most of the North Sea oil companies outlined their plans to contractors suppliers at an Oil & Gas UK industry event in Aberdeen.

One industry insider said the mood from the major players is one of ‘We’re still planning on doing these jobs, but we’re looking at hard at all costs’.

One such company is Total which was last week reportedly reviewing its marginal Alwyn area fields in the light of the decline in the oil price.

A recent report from Oil & Gas UK highlighted the extent of the challenges facing the North Sea industry it says: “Unit operating costs are now 62% higher than they were as recently as 2011.

“Every pound invested in the UKCS (United Kingdom Continental Shelf) yields only about one fifth of the return achieved 10 years ago, and the current situation is simply not sustainable.”

Talisman Energy last week spoke of its asset downtime issues. Across the UKCS production efficiency has fallen on average from 80% in 2004 to close to 60% in 2012, while some operators have now seen it slip to just 35%.

Elaine Maslin, European editor at Offshore Engineer, a trade magazine which covers the sector in great depth said: “There have been marked reductions in spending in the short term and other projects have been put on hold or put under review, such as Chevron’s Rosebank and Statoil’s Bressay, even before the oil price started to tumble.

“The drop in the oil price is salt in the wound, especially in the North Sea, where high operating costs, low production efficiency, high taxes and uncertainty around the shape of the new regulator make the basin less competitive compared to other regions. Shell, Chevron, Statoil, in Norway, and others have been making job cuts.

“But it’s happened before and it’ll happen again. Costs rise, spending is cut, jobs reduced and it all starts again.”

The causes of the oil price slump seem to lie in a slowing world economy and may be partly driven by the desire of OPEC members, primarily Saudi Arabia, to nullify the booming US shale oil market.

The US is now on par with the Saudis in terms of production, but the breakeven price is higher for US players, and as oil prices fall some may be forced out of the market.

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

As well as the North Sea the falling price may also affects developments in other high cost basins such as the deep water developments off the coasts of America, Brazil and Africa.

However it’s not all doom and gloom and last week production started at the major Golden Eagle reservoir, 44 miles north east of Aberdeen, and there are believed to be proposals in place for 150 projects in British waters.

Ms Maslin added: “In the UK, BP recently revealed the possibility of a new, $10 to $15bn central processing facility for the Greater Clair field, and earlier Maersk Oil announced plans to go ahead with the high pressure, high temperature Culzean development.

“Longer term, the UK Government just announced its biggest licensing round in five decades - although few new licenses offered contained commitments to actually drill exploration wells, which is ultimately what will drive longer term investment.”

“Many companies in North East England also have strength in being strong exporters and offering high levels of engineering and manufacturing capability, with some having recently invested in their facilities. This means they will still be able to sell to those markets and companies, such as national oil companies, less affected by the current belt-tightening.”

Mr Hodgson highlighted how the cost challenges are creating opportunities for SMD and fellow Subsea North East members.

SMD is currently designing new ROVs (remotely-operated vehicles) for jobs which would previously have been done by drilling or jack-up rigs for clients looking for smarter, and cheaper ways, to recover reserves.

“The mood in Subsea North East is not one of great concern. This is seen as a quieting off period after market got quite hot.

“There is a slowdown in activity which may last for six months but the contracting and operating community seem to think things will pick up again in the second half of 2015.

“There is a lot of oil and gas out there, productions cost are high and a more favourable tax regime would be of great help.”

Follow Peter McCusker on Twitter @mccusker60

Tax regime

Industry body Oil & Gas UK has repeated calls for urgent reform of the tax regime in light of escalating industry costs and the falling oil price.

In a letter to the Chancellor of the Exchequer last week, Oil & Gas UK chief executive Malcolm Webb points to the deteriorating economics of the mature UK Continental Shelf (UKCS), a situation which has become even more acute.

“Profitability on the UKCS is insufficient to maintain the uncompetitive high tax rates of 62 - 81 per cent paid by production companies,” said Mr Webb.

The Office for National Statistics shows pre-tax returns for the UKCS have fallen to levels last seen in 2005, when the oil price was less than $50 per barrel and tax rates were 22% lower.

Far from gaining additional tax receipts from the UKCS, revenues have fallen by almost two thirds in three years and the OBR has predicted further decline, even before the recent price adjustment.

Meanwhile steps have been taken to fulfil one of the main recommendations of the Wood Review.

Sir Ian Wood made sweeping reform proposals, which aim to ensure all is done to maximise the recovery of the North Sea’s remaining reserves, included the creation of a new regulator designed to ensure the industry works collaboratively.

The Government last week announced that Andy Samuel, BG’s managing director of Exploration and Production in Europe, will be the new chief executive of the Oil and Gas Authority.

Journalists

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