New reality could unlock £200bn of future business opportunities for UK oil and gas
A sustained focus on cost and efficiencies with ongoing uncertainty in commodity markets marks the new reality for the UK’s offshore oil and gas sector, according to Oil and Gas UK’s (OGUK) Business Outlook 2019. The report into industry performance finds continued uncertainty in commodity markets is reinforcing investor caution, with forecasts indicating a conservative outlook for prices. Against this backdrop, exploration and production companies remain focused on cost whilst striving for further business and operational improvements.
While the report finds 62% of contractor companies have an improved outlook for 2019, many areas of the supply chain are still experiencing challenges as industry emerges from one of its most difficult downturns. Furthermore, the study suggests that £200bn will need to be spent by E&P companies in existing operations and new opportunities to realise industry’s Vision 2035 and add a generation of productive life to the basin.
The report shows:
- Production has increased by 20% over the past five years, following 14 years of decline.
- Companies are looking to maintain unit operating costs at current levels, with operating expenditure running at around £7–7.5bn through 2019.
- Momentum is building around exploration activity, with up to 15 exploration wells expected in 2019, including several potentially high-impact prospects.
- Supply chain revenues are anticipated to stabilise, aided by new capital approvals and operational investment. However, pressures remain in some areas of the supply chain.
- The largest 10 E&P companies accounted for just over half of production in 2018 compared to more than two-thirds in 2008, reflecting an increasingly diverse corporate landscape.
- Production from the UKCS continues to provide around 60% of the UK’s oil and gas demand, reducing reliance on imports.
- Drilling activity – key to progressing resources to production – remains at a record-low rate.
- Despite the low level of activity, up to 485mn boe have been discovered from exploration wells drilled in 2018 – a similar total to discovered volumes in Norway but with 20 fewer wells.
- More new projects were approved in 2018 than the previous three years combined, unlocking over £3.3bn of new capital investment and more than 400mn boe of new reserves – a similar number are expected in 2019.
‘Our report finds an industry that’s getting better at what it does, getting smarter in how it does it and is well positioned to deliver attractive returns on investment within this environment, maintaining our global competitiveness,’ said OGUK Chief Executive Deirdre Michie (pictured). ‘This is the new reality and we need to embrace it. However, challenges remain across parts of the supply chain, with revenues and margins still under pressure and cashflow stretched. If capabilities and resources are to stay anchored here in the UK, there must be a competitive proposition for supply chain companies to invest in too.
Commenting on the report, Michael Burns, Oil and Gas Partner at law firm Ashurst, said: ‘The “cautious optimism” tone of the report is consistent with the trends we have been seeing – the oil and gas industry has been successful in adopting new and innovative business structures putting businesses in a good place to withstand some of the broader macro challenges that surround the industry. In particular, innovative ways of structuring acquisitions and new investments have become a normal part of doing business in the UKCS and companies continue to have a key focus on keeping costs down.’
His colleague, Julia Derrick, added: ‘A key challenge faced by the oil and gas industry is the low-carbon energy transition – this issue is tackled head-on in the report, with industry being reassured that oil and gas have a crucial role to play in the UK's future energy mix. The recognition that the MER [maximising economic recovery] strategy is not incompatible with the need to transition to a lower carbon economy should help to bolster confidence about medium- to long-term investments in the UKCS.’
While noting that ‘on-going levels of M&A activity indicate that the appetite to invest in the basin continues to be positive… creating a more diverse corporate landscape,’ Graham Hollis, Senior Partner for Deloitte’s Aberdeen office, noted that: ‘Fresh and forward-thinking approaches to collaboration and business models in the oil and gas industry remain crucial to ensuring the UKCS’s competitiveness and longevity as well as supporting that of its critical supply chain mass.’
Meanwhile, Scotland’s Energy Minister, Paul Wheelhouse, said: ‘It is clear that more needs to be done to realise the industry’s Vision 2035, including diversification into new areas such as transitional technologies and areas such as hydrogen production, and providing sustainable opportunities for the supply chain which, while seeing improvements, is still continuing to face challenges in some areas.’
OGUK Chief Executive Deirdre Michie