UK offshore industry at crossroads

The UK’s offshore industry is at a crossroad, according to Oil & Gas UK’s recently published Economic Report 2018.

The report shows an improved landscape for the sector, with reduced costs, competitive fiscal terms, improved operational performance and more stable oil and gas prices. However, this is tempered by record low drilling activity and a potentially damaging supply chain squeeze.

The report shows:

• UK operating costs have halved and are now being sustained at around $15/boe.
• Production is on track to be 20% higher than 2014.
• More major new projects have been sanctioned by E&P companies so far this year than the last two years combined.

However, this recovery is yet to be felt across the whole of the sector, with the report noting:

• Only four exploration wells were spudded in the first eight months of the year – and even with more wells to come, total exploration activity in 2018 is expected to be the lowest since 1965. The capacity of the supply chain has been reduced in recent years, as revenues and margins continue to be squeezed. 
• By 2021 there could be capacity constraints emerging across the supply chain, as a result of the reductions in recent years and an expected increase in new development activity at home and abroad. The constraints are expected to be felt most across drilling and well services and within engineering and subsea sectors.

Speaking at the report launch, Oil & Gas UK Chief Executive Deirdre Michie said: ‘The industry is emerging from one of the most testing downturns in its history. However, the steps that have been taken by industry, government and the regulator have delivered tangible results.’ However, she notes that: ‘Despite the improvements seen in recent years, we find ourselves at a crossroads. Record low drilling activity, coupled with the supply chain squeeze, threaten industry’s ability to effectively service an increase in activity and maximise economic recovery.’

She continued: ‘The UK Continental Shelf is a more attractive investment proposition – our challenge now is to take advantage of this. We have to drive an increase in activity while continuing to find and implement even more efficient ways of working which support the health of supply chain companies whilst also keeping costs under control…. Investment conditions remain key to the long-term future of the North Sea industry.’

Commenting on the findings of the Economic Report 2018, Shaun Reynolds, Partner and head of the oil and gas transaction services team at Deloitte in Aberdeen, says: ‘Whilst production remains strong, which is testament to the resilience of the North Sea operators and supply chain, there is a strong feeling across the industry that we cannot become complacent following an uptick in the oil price. In particular, a key issue persists around the long-term impact of lower levels of exploration and appraisal drilling.’

‘It is imperative that we preserve the current low-cost environment, but with ageing infrastructure and the possibility of a capacity pinch-point in the next few years, that will be a challenge. The industry should continue to incentivise innovative investment and reward those in the supply chain who work smart to maximise efficiencies and results. This is vital as a number of fields in the UKCS will attempt to progress through the development process in the next few years and, if sanctioned, will be of massive significance to the UKCS and the wider economy, of which oil and gas remains a critical component.’

Meanwhile, Michael Burns, Oil and Gas Partner at law firm Ashurst, notes: ‘The report confirms just how resilient the UK oil and gas industry has been, and there is certainly a “good news story” to be told in terms of continued reductions in development and operating costs, as well as new projects reaching final investment decision stage. What cannot be ignored is the fact that drilling rates are down overall, but hopefully the newer investors in the basin will provide new impetus to generate future activity. In this context, the report sounds a timely warning about the uncertainty currently being presented by the ongoing Brexit negotiations and how crucial the right deal will be for the industry.’

Oil & Gas UK Chief Executive Deirdre Michie
Photo: Oil & Gas UK