OGUK warns industry position is ‘paper thin’ in the face of oil price and coronavirus pressures

The combination of the global economic impact of the continued spread of the coronavirus (Covid-19), the most dramatic fall in oil price in almost 30 years and a halving of gas prices is driving an increasingly fragile outlook for the UK’s offshore oil and gas sector, warns the OGUK. Severe pressures are already building across the sector’s supply chain, and are expected to significantly undermine its businesses, jobs and contribution to the economy.

The stark warning was made in a series of Business Outlook reports from the OGUK, which will shine a light on the issues facing the sector in a challenging and dynamic business environment.

The Business Outlook: Markets and Investment report shows OGUK now expects drilling levels to fall back to the lows experienced in 2016, down more than a third on previous forecasts. The report also warns of a possible 20–30% decrease in capital investment for 2020, as well as the potential that the operators in the sector will experience negative cash flow this year.

While the industry was only beginning to emerge from one of the most prolonged and severe downturns in its history, OGUK says the supply chain has remained under significant pressure, with tight margins and relatively low activity levels.

OGUK is calling for government support to ensure the sector can continue to provide security of supply in the face of these extraordinary difficulties. The body is also working with industry, regulators and government to understand how it can protect supply chain companies and jobs. 

OGUK Chief Executive Deirdre Michie says: ‘Businesses and industries across the UK are facing extraordinary pressures, but coming so soon after one of the worst downturns in our history, this report shows that this sector is now in a paper-thin position. The offshore oil and gas sector is part of the UK’s critical infrastructure, providing the secure and affordable energy the country needs, and is a key contributor to the economy in terms of supporting hundreds of thousands of skilled jobs, businesses and our wider economic contribution. Action is needed now to ensure the sector doesn’t lose the skills, experience and infrastructure it needs to meet the UK’s energy needs of today as well as help deliver its net zero ambitions in future.’

OGUK Market Intelligence Manager Ross Dornan adds: ‘The first week of March saw the most dramatic fall in oil price in almost 30 years and it remains uncertain as to how the market is going to evolve in the coming months as the coronavirus impact increases each day.

Alongside this, the gas price has more than halved in the last 12 months, and we face a situation where E&P production revenues are set to be almost 50% lower than they were two years ago despite the same level of output.’

‘The UKCS has seen significant improvement in its competitiveness, efficiency and productivity in recent years. These improvements will help performance. However, in this harsh environment we expect companies to take significant steps to preserve cash flow and ensure business continuity. This will have a very negative impact on the supply chain, which has not yet seen much recovery from the previous downturn and doesn’t have the capacity to absorb much more pain. Companies are increasingly diversifying into other energy sectors and across industries more generally, but many cannot diversify or are too early in their journey to provide adequate protection/buffer. At this time innovative thinking, partnerships and meaningful collaboration will be required to help as many as possible to weather the storm.’