This will be a challenging year for the North Sea but the necessary austerity may create a new appetite for near-to-market technologies. The average cost of bringing oil to the surface globally is around $7 a barrel, in the North Sea the average is $28, and in some of our fields it is nearly four times that. As a result, the second half of 2014 was brutal to North Sea operators’ profit and loss accounts with 2015 offering no respite. Operators are prioritising cost efficiencies and reappraising capital programmes, while the supply chain is doing its bit as part of the industry belt tightening.
As the oil price plummets to its lowest level in more than a decade, oil and gas industry bosses in the north-east are making cuts to curtail declining profits. We can’t avoid that reality. The energy sector is increasingly feeling the pinch and staff layoffs are inevitable as challenging times ensue over the next quarter and beyond. Redundancies in any company during a recession are tough. But in a cyclical market, it is important to try and make the process as pain-free as possible for those whose jobs could be at threat.
The North Sea oil industry is one of Scotland's great success stories. For decades it has sustained thousands of jobs, generated billions in tax revenue and acted as a platform for exporting the talent and expertise of this great nation around the world. But the industry is at a crossroads.
The North Sea survived the oil price crash of the mid 1980s, which saw Brent sit at around half of its pre-86 level for over a decade. The oil industry is, by its very nature, cyclical. In the 80s the North Sea was at a very different stage in its life.
I’ve been told that scores of companies in and around Aberdeen are now letting go of people as the oil price-driven depression deepens in high cost oil & gas provinces around the globe. The likelihood is that several thousand jobs in our area have either gone or are about to be axed. Remember, it’s not just the UKCS that’s being hammered.
During the holidays, a friend was driving home and said she spotted a fracking well soon after she crossed into Texas. She wasn’t happy about it. Another friend posted on Facebook a picture of gas prices below $2 a gallon — something that hasn’t happened in more than five years — and commented that the low price made him feel as if “he was stealing something.” In America, the world’s largest energy-consuming nation, the biggest fractures occur not in deep underground shale formations but in the way we separate our perceptions of energy from reality.
Alex Salmond was quoted in Energy Voice's sister publication, the Press and Journal yesterday, as saying that “oil was too important to leave to Westminster”. Given that he based his projections for an independent Scotland on $110 a barrel and got it very, very wrong, I would agree with the majority of Scottish people that oil is far too important to leave to him. The continuing fall in the price of oil, while good for reducing pump prices and keeping costs down, is clearly a huge issue for the 375,000 people across the UK who work in the oil industry and related activities.
Secessionist supporters will long remember 2014 as the year when Scotland came close to grabbing the mantle of freedom. Non-nationalists voters will see things differently as they salute the continuance of what they perceive to be the security blanket of being a member of the United Kingdom, despite having witnessed the unedifying spectacle of Clegg, Cameron and Milliband linking arms as they promised the earth for a ‘no’ vote. The Smith Commission’s devolution recommendations have already been dismissed by ‘yes’ voters as too little and frankly too focused on devolving administration rather than power. Membership of the SNP has soared as a consequence.
Predicting oil price movements is as risky as exploring for oil itself. The average price for crude fell 10.3% from the start of 2014 to the date of the Scottish independence referendum on September 18. It fluctuated over this period – but few, if any, were predicting any major move in either direction in the months to follow. Yet during the past three months we have seen another 48.4% fall. Geopolitical factors involving OPEC, the US, Russia and Iran, as well as the economic decline of China and the Eurozone, have been touted as contributory causes.
Last year, I wrote about how EU sanctions restrictions were starting to bite on the industry, particularly in light of newly implemented restrictions against Russia, Crimea and Ukraine introduced throughout 2014. These rules have seen an increase in sector-specific sanctions, targeting particular oil and gas activities (deepwater, Arctic and shale projects in Russia in particular), specific types of oil-related technologies and associated services, including drilling, well-testing and the supply of specialised floating vessels. With ongoing amendments and additions to the restrictions through to the end of 2014, it can be fairly assumed that sanctions issues will continue to be a common concern for business in the new year.
Today, the price of Brent bland passed to the dark side, falling below $50 a barrel though it did cheer up a little later. Given the now colossal slide from $115 on June 19 and the determination of OPEC to stick to its decision made in November to defend market share, it is hard to know when and where bottom might be reached. Gradually, it is dawning that this won’t be a short-sharp nasty event.
It is clear that upstream oil & gas will be a tough place for the next 12 months. The compound impacts of high-cost production coupled with low oil prices will squeeze profitability for all stakeholders. It looks unlikely that oil prices will improve in the short term, as such. That means the industry has to focus on the one area it can influence – cost. If you consider the macro position, we at Douglas-Westwood are of the view that the fundamentals are still intact and on the whole favourable.
The industry is going through what oil workers have described as a crisis period. At the time of writing, the oil price has fallen below $54. That's less than half the price predicted by the SNP in their White Paper, which formed the economic basis for their independence case. But more immediate than the politics is the fact the plummeting oil price has resulted in a number of firms cutting the wages of their staff.
The speed with which the North Sea’s prospects have become engulfed in crisis and doom-laden predictions has taken the world, and not just our own small corner of it, by surprise.
At the outset, let me make the following clear: First, the UK offshore oil and gas industry faces some very serious challenges but it is NOT in danger of being wiped out. While the industry is certainly not enjoying the best of health right now, it can and will recover. Second, the troubles we face are not all down to the recent fall in the price of oil, that is a serious complication but it is not the root cause. Third, while I am certain that these problems can and will be overcome, the cure, if it is to be effective and lasting, requires urgent, positive and collaborative action by all stakeholders across Industry and Government over the coming weeks, months and years.
Throughout my career I’ve been involved to some extent or other in the development and commercialisation of technology. So, when faced with a selection of technology ideas to back I am acutely aware of the difficulties involved in sorting the wheat from the chaff. Believe me. It isn’t easy because the parameters you need to consider are many and varied and, of course, instinct and experience also count for a lot.
Oil prices have crashed and the North Sea is hurting badly, with the likelihood that this is going to be a prolonged downturn . . . at least for the bulk of this new year, if not longer. Capital investment in the North Sea could halve by 2017 unless there is urgent reform of the tax regime in light of a big drop in the price of crude oil, according to Oil & Gas UK, which is hoping for good things from the Treasury before the May election following promises made early last month. And Wood Mackenzie has estimated that 32 potential European oil field developments worth more than $85billion (£55billion) are waiting for approval and could be at risk if oil prices continue to slump. A high proportion of those projects have a break-even price higher than $60 per barrel and many are in the UK sector.
A generous spirit and calm disposition are desirable qualities at this time of year. From giving and receiving gifts, making long drives for annual visits or even putting up with certain relatives, commitment and patience are needed. The North Sea oil and gas industry needs a similar outlook in 2015. There are going to be challenging times, but with less self-interest and more collaboration there are certain to be good times too.
Predicting “uncertain times” for 2015 is no prediction at all. In this industry change is the only constant. It always has been. As we pass through the gate of the year I can’t tell you what the oil price will be tomorrow let alone in 90 days time. However, there is plenty more that is predictable. Fortune favours the brave.
Have you ever looked at someone and thought how did they get there? Maybe their new job alert on LinkedIn, a sudden shift in seniority or even an upgrade in their car or housing situation triggered the question.
Crystal ball gazing is an entertaining but hazardous occupation and let’s be honest, who accurately predicted that a 40% drop in the price of crude oil lay ahead? That said, heading in to 2015 there are certain steps which can be taken to ensure the UKCS is sustainable and competitive on the assumption of a low oil price in the mid-term.
The precipitous decline in oil prices during the past six months creates the sort of economic upheaval that’s likely to alter the course of companies and countries. Brent crude has been steadily falling since mid-June, and now sells for almost half the $115 a barrel it did then. Even if oil prices rebound in a few months – which isn’t likely – the Bust of 2014, as it will become known, is going to leave a lasting mark. We’re already beginning to see reactions in the energy industry. Earlier this month, ConocoPhillips, the biggest U.S. independent producer, said it would slash its 2015 capital budget by 20 percent. A few weeks earlier, Halliburton announced plans to buy oilfield service rival Baker Hughes for $35 billion, which was quickly followed by plans to shed 1,000 jobs in the Eastern Hemisphere. In mid-December, chief executive David Lesar said more cuts could follow next year as the market for drilling services weakens. BP CEO Bob Dudley emphasized recently that his company’s costs are too high to compete in an environment of lower crude prices. The company plans to cut jobs and may also close or sell some sites or plants, Dudley said. BP, of course, has long been rumored as a takeover target, with Shell mentioned as the most likely suitor. BP’s shares have trailed its peers since the Deepwater Horizon disaster in April 2010, and greater clarity on the extent of liabilities from that case, combined with lower oil prices, could make it more vulnerable to a buyout. The industry hasn’t seen a mega-merger like that since the bust of the late 1990s.
There has been an increased focus on the energy industry in recent weeks and months as a result of quickly decreasing oil prices. A key objective for the industry in 2015 will be to identify where savings can be made whilst maintaining optimum exploration and production activity. As a result, government support is required to ensure the industry is sustained. Some positive changes were announced in the Autumn Statement, including a small reduction in the rate of the supplementary charge and the extension of the ring fence expenditure supplement. However, those in the industry will be lobbying hard for further reforms to the oil and gas fiscal regime. We already know of several areas that the government, together with the Oil and Gas Authority (OGA), will be focusing on in the New Year.
Happy new year. As the dust settles on a momentous year in Scotland's history, thoughts turn to 2015, a year likely to be highly significant in the future of the North Sea. Returning to work in January, we contemplate life under a new regulator, changes in taxation and further mature sector challenges. All of this is, of course, underpinned by plummeting global oil prices which have paralysed new investment, leading to painful cutbacks across Aberdeen. The International Energy Agency (IEA) sees oversupply continuing in to 2015 although price predictions invariably confound analysts; how to forecast the relative impact of American shale, Saudi market-share strategy and post-Ukraine sanctions on Russia? High prices may be some way off, however, as cheap oil is seen by many importing nations as the biggest and easiest GDP-booster out there. Low prices may well lift the global economy in 2015 (and perhaps have political consequences amongst beleaguered exporters).
Having reached 2014 highs in June, crude oil prices started to free fall and in the search for reasons some people have pointed towards the International Energy Agency's (IEA) changing demand and supply expectations. Since June, when its 2014 global oil demand growth forecast hit a peak of 1.4million barrels per day (bpd), IEA’s projections have fallen by half. By contrast, supply expectations have been much more stable – since June, the IEA's forecasts of non-Opec (Organisation of the Petroleum Exporting Countries) oil supply growth have expanded by a modest 300,000bpd and the IEA's non-Opec supply forecast is currently only 100,000bpd above the level at which it started 2014.