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Brighter Times Ahead For North Sea Oil And Gas Firms

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THE North Sea oil and gas industry can look forward to brighter times next year with firms adapted to the new normal of relatively low crude prices, experts have said.

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Following three years of deep cost cutting in response to the sharp fall in the oil price since 2014, companies are expected to put renewed emphasis on growth in 2018.

The wave of company failures which blighted the area may have about run its course.

However, with firms in the supply chain likely to remain under pressure there is no indication many new jobs are on the way to compensate for the thousands of lay offs seen in recent years.

After bodies such as Aberdeen and Grampian Chamber of Commerce reported signs of recovery in the North Sea recently, prominent oil and gas specialists said confidence is definitely on the rise off Scotland.

“A sense of cautious optimism has returned to the North Sea after a very challenging few years,” said Graham Hollis, senior partner for Deloitte in Aberdeen.

Fiona Legate, senior UK exploration and production analyst at Wood Mackenzie, said the energy consultancy reckoned 2017 represented the bottom of the market. “It does feel we are over the worst,” she said.

The improvement in sentiment partly reflects growing confidence the crude price will remain at around $60 per barrel after exporting countries agreed to extend curbs on production through 2018.

Crude sold for less than $30/bbl in the first quarter of 2016, before Opec members decided in November of that year to limit output to support the market.

Signs that stability is returning to the market have helped trigger a surge in mergers and acquisitions activity in the North Sea. Trade body Oil & Gas UK reckons the value of deals jumped to around $8bn from $2bn in 2016.

Mr Hollis noted a number of private equity-backed firms became active or significantly increased their presence in the UK North Sea in the past 12 months. These include Chrysaor, which bought a $3.8 billion portfolio from Shell.

“We are likely to see more transaction activity in 2018, as the basin continues to recover from a prolonged downturn in investment and overall activity levels,” he predicted.

Kevin Reynard, PwC’s senior partner in Aberdeen said its oil and gas deals team has lots of work on.

He noted tax breaks included in the November Budget should encourage interest in the area.

Experts reckon the price expectations of buyers and sellers are more in line than they were in the depths of the downturn.

Majors are likely to continue selling North Sea assets to free up funds to invest elsewhere. BP and Shell have been prominent sellers.

However, Ms Legate noted signs of renewed interest in exploration on the part of majors such as BP.

It is investing heavily with Shell West of Shetland where Ineos has made clear it wants to be a major player after buying assets from Dong Energy in 2017.

The expectation is firms that buy acreage will invest in areas such as increasing production and extending the lives of fields. “Companies are not spending $3bn buying assets not to invest in them,” said Mr Reynard.

Ms Legate noted existing owners have also shown willingness to invest after three years of sharp cuts in spending in areas other than essential maintenance.

“People are starting to make investment decisions, which we have not seen,” said Ms Legate.

She added: “We’ve reached the new normal. There’s been a lot of adapting and cuts in operating costs that have helped … people are starting to look at growth and the future.”

Hurricane’s decision to approve the $500m Lancaster development off Shetland has generated excitement.

Wood Mackenzie expects costs will rise next year as supply chain workloads increase.

But services firms will still face pressure to help clients increase profitability.

The prospect of a return to the boom conditions seen amid the period of high crude prices that ended in 2014 remains remote.

Sector watchers have welcomed the start up of some big fields this year, such as EnQuest and Cairn Energy’s Kraken development. These were commissioned during the boom.

But the start ups have left services firms needing new work. Ms Legate notes of 20 North Sea projects in contention for approval only Chevron’s Rosebank is on the scale of big fields started recently.

With bumper developments such as Clair Ridge due to come onstream in coming months, Wood Mackenzie expects capital investment of $6bn in each of the next two years, compared with $8bn in 2017 and $21bn in 2014.

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