Investors seeing value in UK North Sea re-inventing itself

Nearly $6bn worth of mergers and acquisitions (M&As) have taken place in the UK oil and gas sector in the first half of 2017 – sending a strong vote of confidence in a basin that has been grappling with the challenges of a major downturn, according to Oil & Gas UK’s just published Economic Report 2017.* Indeed, the trend looks set to continue, with Total’s proposed acquisition of Maersk Oil announced in the run-up to the report’s launch at Offshore Europe in Aberdeen in early September.

Assets changing hands and the increasing diversity in their ownership suggest that the UK Continental Shelf (UKCS) may start to benefit from a badly needed investment boost. Although market conditions remain difficult, the report demonstrates that the UK sector is reinventing itself. It is differentiating its offering from competing oil and gas provinces with its efficiency gains, fiscal competitiveness and world-class supply chain.

‘While investors still want more certainty over Brexit and clarity over the role of oil and gas through a more comprehensive energy policy, the transformation underway is restoring the UK’s position as an attractive basin for investment – and one still supporting over 300,000 UK jobs,’ notes Oil & Gas UK. ‘The challenge now is to ensure this renewed interest in the basin translates into tangible activity that could help unlock around £40bn worth of potential development opportunities known to be in company business plans.’

The report also shows that companies are becoming more efficient and competitive, and are better placed to cope with the lower oil price environment. The cost of lifting oil from the North Sea has almost halved since 2014 – an improvement to unit operating cost that is claimed to be greater than improvements achieved by any other basin – while UKCS production has increased by 16% since 2014, driven by production efficiency improvements, brownfield investment and new field start-ups. It also suggests that while businesses have rationalised, the pace of contraction is slowing. Meanwhile, changes to the tax regime have helped create one of the most competitive fiscal regimes for upstream investment globally.

However, while confidence is slowly returning to the North Sea basin, challenges continue across the sector. Low levels of exploration and appraisal activity remain a serious concern, with drilling at record lows, and the basin still needs further fresh capital investment as only three new field approvals have been sanctioned since the start of 2016. If activity does not pick up this could have further negative implications for jobs that could threaten core capabilities, warns the report. It also called for the UK government to make an ongoing commitment to the Driving Investment Plan and to implement transferable tax history (TTH) to facilitate asset transfer.

According to Deirdre Michie, Chief Executive of Oil & Gas UK: ‘There are still serious issues facing our industry which has suffered heavy job losses since the oil price slump. But we are hopeful that the tide is turning and expect employment levels to stabilise if activity picks up. Despite our difficulties, we’ve got more reasons to be positive and some great stories to tell that demonstrate the real progress that we are now making. Our sector is successfully re-positioning through efficiency and cost improvements. We are transforming in a way that is getting UK oil and gas back in the game. We are increasingly being seen as a much more attractive basin in which to invest with further M&A activity expected over the remainder of this year and into the next.’

She continues: ‘Although we are getting to a much better place, we still need further investment to generate new activity and sustain hundreds of thousands of UK jobs. While industry will maintain its relentless focus on improving its cost and efficiency performance, government can continue to play its part – by developing a clear energy policy that reinforces the role for oil and gas in the Industrial Strategy, supporting a Sector Deal and confirming in the Autumn Budget that decommissioning tax relief will be modified to support further investment activity.’

‘Our potential is captured in Vision 2035 – an aspiration for our sector that shows that we can continue to deliver hundreds of billions of pounds in revenue over the next generation and beyond if we maximise recovery of our resources and help our supply chain grow. With global oil and gas demand forecast expected to rise by 25% to 2035, we have a crucial part to play now and during the transition to a lower carbon future.’

Commenting on the report, Graham Hollis, Senior Partner for Deloitte in Aberdeen, reiterated the need for a collaborative approach going forwards: ‘Challenges still remain for the North Sea and its recovery needs to be carefully fostered. The report shows there are a potential £40bn worth of developments in companies’ business plans – it’s up to all of those involved in the industry to help these come to fruition, requiring a collaborative approach between government, the business community, the supply chain, and wider stakeholders.’

‘The UKCS is vitally important to our economy and still supports more than 300,000 jobs. To ensure its future, we need to set about anchoring that talent pool in Aberdeen and the surrounding areas. While it will mean keeping the skills we already have, it will also mean ensuring we continue to attract a new generation of talent, which can carve out a new path for the industry in the years ahead.’

Meanwhile, Scott McClurg, Head of Energy, HSBC Corporate Banking, says: ‘The time has come for revolution, not evolution, in the UK oil and gas sector. The convergence of technological advancement and cost pressures associated with the oil price slump has led to bold thinking and opened up fresh investment opportunities. Ambitious change also makes UK firms stand apart in a global transitional race.’

‘The role of data, automation and robotics in re-shaping the industry cannot be understated. Today’s valve manufacturers will be tomorrow’s subsea data providers. If the UK can steal a march on its international rivals in this space, its oil and gas sector can set the global standard for high-tech energy supply, and reap the rewards accordingly. The North Sea is still rich with opportunity, but no longer simply because of the barrels of oil – data, not drilling, is part of the sector’s future.’

*Visit https://oilandgasuk.co.uk/economic-report-2017.cfm to download a copy of the report.