North Sea industry hopes oil settles at $60-70 for longer

The company operates Buzzard, the largest producing field in the North Sea
The company operates Buzzard, the largest producing field in the North Sea

Oil prices settling in a sweet spot of $60-70 per barrel would give North Sea firms more confidence to kick on with investment plans, industry experts have said.

They stressed the recent Brent crude slump did not threaten the sector’s recovery as firms now calculate budgets based on lower price assumptions. Costs cuts and efficiency gains during the downturn have made industry more resilient.

Derek Leith, oil tax expert at EY, is sure bosses would not have banked on Brent staying at $85 – a four year high reached in early October. Many observers believe a $55-65 range would support development plans, though most producers would favour a stable $70, he said.

Mr Leith said: “The focus on production activity and managing costs remains a priority for the North Sea and I don’t think anyone was getting carried away with the short spike of $85.”

Martin Findlay, of KPMG, said decision-making on projects would always be informed by medium or longer-term price forecasts. He said recent technological advances have reduced North Sea lifting costs and made projects viable at current prices.

He said: “No-one was ever going to plan based on $85 being a stable price level, although it provided some ‘super-profits’ that gave oil companies the cash that can now be deployed selectively for investment. Brent priced at around $60 is a level where UK projects can be viable and where increases in North Sea activity should continue.”

Kevin Swann, research analyst at energy consultancy Wood Mackenzie (Woodmac), reckons a window of $60-70 would be “comfortable”.

Mr Swann said a lot of projects were being sanctioned globally at a breakeven oil price of $35 per barrel.

Prices nearer $40 or $50 would put projects in the “risk zone”, he said.

Earlier this week, Woodmac predicted that North Sea exploration drilling would pick up in 2019, and that a dozen new projects would be sanctioned, making it another “bumper year.”

Read: North Sea firms to sanction wave of ‘small but beautiful’ projects in 2019

Paul de Leeuw, director at Robert Gordon University’s Oil and Gas Institute, said the UK Continental Shelf (UKCS) remained highly exposed to price movements.

“Every $1 per barrel change in 2019 is roughly equivalent to £275m in revenue,” said Mr de Leeuw.

Prolonged volatility could have longer-term implications as companies would need to be “more thoughtful about managing cash, assessing investment choices and about reducing risks”, he said.

But he said the impact of the recent price shift would be “modest” in the near term, as most of the work slated for 2019 is already under way, or has been contracted.

Neil McCulloch, an executive at Spirit Energy, said oil price turbulence was par for the course.

Improvements in efficiency and lifting costs since the downturn have raised the UKCS in the “merit order” of “upstream investment destinations”, Mr McCulloch said.

He added that activity levels were increasing at a “sensible pace”, with more work likely to materialise from 2020 onwards.

EY’s Mr Leith said energy service companies were more likely suffer at the hands of oil price reductions.

“Suppliers would have seen $85 oil as offering the potential for a recovery in pricing and hence some margin improvement,” he said.

“The decline in the price has meant that oilfield service companies will need to continue to focus on innovation, technology and new commercial practices rather than a return to the pre-2015 world.”

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