The oil & gas industry is undergoing a major restructuring and nowhere is this more pronounced than in the United States. Since the plunge in oil prices during the latter half of 2014 and early 2015, E&P operators around the world have made cost reductions central to their short-term business plans. Oilfield service companies are coming under severe price pressure, including requests to reduce costs by 50% in some sectors, while rig contract renegotiations are increasingly visible and impacting the bottom line of drillers both on and offshore. At the time of writing, cost reduction initiatives show no sign of abating, despite some signs of life in the oil price.
At the time of writing this article, the Brent crude oil price benchmark had fallen to $85 from $115 in June on concerns of abundant global oil supply and weakening demand. Goldman Sachs, the international investment bank, earlier in the week released a price prediction of $80 for 2015 having reduced this from $100 previously. Markets are spooked and bearish sentiment is plaguing the energy sector. Concerns are that the cost and operational challenges we have witnessed in 2014 in the UKCS, compounded with commodity price reductions, could spell a difficult time for investment and activity in our home market.
It's evident that the UK oil and gas market is going through adjustment following a period of substantial investment growth.
Over the past five years, the wealth creation in the Scottish north-east has been conspicuous. This said, the UK is facing a crisis due to reduced production and major cost increases which is simply killing the industry.
Watching any television coverage or wider press regarding the activities of unconventional oil and gas investment, the word "fracking" has universally replaced all references to oil & gas exploration and development. Sadly, this is not a positive.
Trying to predict what M&A activity will transpire during 2012 can be done with one guarantee - it will turn out quite differently from what we expect.