Oil companies told to 'hang on in there' during North Sea price slump

Offshore firms are hoping for drop in punishing tax regime in February's Budget

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

Following a 60% drop in price all of the world’s oil companies are reining-in expenditure plans and the industry is bracing itself for further job losses.

Worryingly the North Sea is now well down the oil companies’ pared-back investment plans as a result of the punishing UK tax regime and a huge rise in costs.

With a one-third of the basin’s reserves still in place, there are growing calls for the Government and industry to ensure these are garnered.

Malcolm Webb, Oil & Gas UK’s chief executive, said: “Evidence of the threat from the falling oil price to UK investment and jobs is mounting daily with oil and gas companies cutting exploration and capital budgets and reviewing headcounts.

“We are encouraged to see a growing political and industry consensus around the now pressing need for more fundamental and urgent changes to the tax regime.  

“With a significant amount of UK oil and gas production not even covering costs at a $50 oil price, the industry cannot carry the burden of a tax rate between 60 and 80%.

“The credible and reasonable response for the Chancellor in his upcoming Budget, assuming the oil price has not recovered by then, is the abolition of the 30% supplementary charge on corporation tax, which was introduced and then increased in direct response to rising oil prices, most recently in 2011.

“This would still leave oil and gas producers paying corporation tax at 30%, a tax rate 50% higher than the rest of British industry.”

Anthony Devlin/PA Wire Chancellor George Osborne
Chancellor George Osborne
 

There are signs the Government is listening. In the Autumn Statement Chancellor George Osborne cut the Supplementary Rate by 2% and speculation is mounting it may be axed in March’s Budget.

The industry recoiled when it was increased in 2011, and subsequently the Chancellor introduced a host of allowances leading to record levels of new investment with many new fields coming on stream in recent years.

However, this still leaves the battle to cut costs. Mr Webb continued: “The industry’s cost base, particularly on a unit of production basis, has risen alarmingly in recent years. For all businesses a positive cash flow (the excess of cash income over expenditure) is important.

“Unfortunately, if you take the UK North Sea as a whole, it now has a negative cash flow. In other words, looking across the entire industry, we are spending more cash than we generate. This is not a sustainable position to be in.

“Oil & Gas UK research shows that, in the last three years alone, costs have soared by 45%. That awful fact was disguised somewhat by the high oil price but now that mask has been stripped away.

“If that was not bad enough, we have also seen production volumes fall by 40% over the same period. This, in part, is because the average production efficiency of our fields (which is the percentage of time fields are actually producing oil and gas) has slipped from over 80% to about 60% today.

“That is the equivalent of losing about 500,000 barrels of oil and gas a day.”

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

With the North Sea being a mature basin much of the easier reserves – over 40 billion barrels of oil equivalent - have already been recovered and the harder to reach reserves are more costly to get.

Some of these - such as those in the new Statoil’s Mariner field, which came on stream last year - have lain untouched for decades and require innovate technology solutions.

This, along with an overall decline in production efficiency from 80% to 60%, rising wages and a falling oil price mean the maths no longer stack up.

Mike Tholen, economics and commercial director for Oil & Gas UK told Journal Energy: “Costs per barrel have risen and this is partially due the fall in production efficiency. The older kit in some of the older fields is becoming more expensive to run.”

Energy and Climate Change secretary Ed Davey last week took steps to support the long term future of the industry.

Last year the Government appointed industry executive Andy Samuel as CEO of the new Oil and Gas Authority, which has been created to ensure all is done to maximise recovery of the basin’s remaining reserves, in light of Sir Ian Wood’s review into the industry.

The Wood Review concluded that there were 15 to 21 billion barrels of oil equivalent still to recover and that the industry needed to work more collaboratively to secure them.

Speaking in Aberdeen last week Mr Davey said: “The oil and gas industry is used to volatile prices in world markets and will get through the latest downturn as it has in the past.

“However, given the huge value of the UKCS to the nation and the relatively high cost base that it has, I am concerned to make sure that it does so in the best possible shape for the future and well placed to deliver our goal of maximizing economic recovery as set out by Sir Ian Wood.

“I am therefore today asking Andy Samuel, CEO of the new Oil and Gas Authority, to undertake an urgent piece of work, involving industry, to come up with practical measures to mitigate the immediate risks that the downturn in prices presents us with. There is a lot at stake and I know that industry leaders will lend weight to the work that I have asked Andy to do.”

“I have asked Andy to present his early findings to me by the end of February.”

While the prospects of new exploration and developments being sanctioned in the current environment look bleak, Mr Tholen was quick to highlight how there are still a number of projects coming to fruition, following record recent investment which have arrested years of overall production decline.

French oil major Total’s Laggan Tomore field is expected to come on stream later this year and last week it started gas and condensate production from its West Franklin Phase 2 project.

BP is pressing ahead with two major projects - Clair Ridge and Schiehallion – and these are expected to come on stream in the next couple of years.

Mr Tholen said: “There was a lot of investment last year and investment has not stopped completely.

“While the balance sheets of all companies have suffered, those with the money to do so are looking at new and existing projects and planning investment for a few years down the line.

“Operators need to have their eyes on a number of things, and the price of oil and the tax regime are both featuring prominently right now.”

He added: “This is a cyclical industry and there will be more downturns over the years, but it is important to remember there is still at least 30 years of oil left in the North Sea.”

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A North Sea oil rig
A North Sea oil rig
 

 

With North East oil and gas supply chain companies looking anxiously to the future senior industry executives say it’s important to adapt to changing circumstances.

Paul Charlton is chief executive office of Hexham-based PDL Solutions, an offshore engineering design and analysis consultancy. He is also chairman of Durham-based supply chain representative body NOF Energy.

He said: “I have been in the industry for 28 years and the current downturn will re-balance, but in the meantime it may get messy.

“In the downturn companies need to be mindful of the importance of working with their customers, of aiming to do things differently and of being prepared to be flexible. Work with your customers and accept these challenges as an opportunity.

“Here at PDL we are doing that. We are looking to improve efficiency and reduce costs.”

He believes there needs to be a complete overhaul with many projects currently being over-engineered.

He continued: “Costs have risen by 45% in the last four years, which is unsustainable and will lead to losses in the long run,

“While the engineering involved needs to be safe and fit for the purpose we can reduce costs through greater collaboration.

“We need to challenge everything in the short term, medium term and long term.

“The North Sea has a further 30 to 40 years life but we do need to undertake a fundamental change in the way it operates.”

He also believes North East companies who are not looking to work in in overseas oil provinces are missing a trick.

“While the global oil price is affecting all regions the lifting costs in the North Sea are higher than almost any other basin and therefore the impact is greater on the UKCS (United Kingdom Continental Shelf).

“As a company we are finding there is still activity in the Gulf of Mexico and the Asia Pacific region. Here the oil is less expensive to get than in other regions.”

George Rafferty, chief executive of NOF Energy, said: ¨Working closely and smarter with operators and lead contractors, supply chain companies can help deliver a step change in the industry through increased collaboration and a fresh approach to doing things. This will ensure whether the industry needs to better control costs or react to changes to the oil price the industry can become more resilient and effective.” 

Mike Tholen, economics and commercial director for Oil & Gas UK, had a message for the North East supply chain. He said: “I don’t want to sound glib, but hang on in there, don’t abandon hope. Companies will not doubt be nervous, and it may feel pretty scary but the North Sea has a long term, secure future.

“Investment will return. In the meantime £10bn was spent on operational expenditure last year and we expect to see the same amount spent this year.”

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