North Sea needs £200bn investment, says flagship report

OGUK chief executive Deirdre Michie with report authort Ross Lynch visiting Tendeka ahead of the report launch
OGUK chief executive Deirdre Michie with report authort Ross Lynch visiting Tendeka ahead of the report launch

The North Sea will need investment of £200billion in order to add another generation to its production life, according to a flagship report published today.

Trade body Oil and Gas UK has released its 2019 business outlook, setting out that new exploration is expected bounce back from last year, which saw lowest levels since the 1960s, while production is also on the rise.

Meanwhile drilling activity is at a “record low rate” and supply chain firms remain under “significant financial stress”.

The report states that operators will need to spend £200bn over the next 16 years to achieve “Vision 2035”, an industry objective to extend the life of the UK offshore sector.

According to the document, exploration and production firms will need to spend £200bn on “finding, developing and operating” future reserves to stimulate activity.

However, it comes amid a steady decline in capital spending which has fallen by more than two-thirds since 2014 to £5bn last year.

Capital expenditure will make up a significant chunk of the £200bn, along with decommissioning and operational costs, meaning attracting a steady stream of investment will be “crucial” going forward.

Vision 2035 is an industry ambition to unlock around four billion extra barrels of oil equivalent from the North Sea, increase government revenues and double the UK supply chain’s share of the export market.

“NEW REALITY”

The outlook report sets out that many supply chain firms are still feeling challenges from the recent downturn, with reduced margins and revenue.

Oil and Gas UK CEO, Deirdre Michie said there “must be a competitive position” for suppliers to remain and invest in the UK, urging fellow suppliers and operators to collaborate to improve costs.

However, in a survey of its member firms, 62% of suppliers reported a more positive outlook for 2019, compared to last year.

OGUK said a “new reality” is in place for the sector, with renewed focus on cost efficiencies and caution on the oil price.

Report author Ross Dornan said a 40% drop in oil price at the end of last year did “shake” investors.

Drilling activity remains at record low levels as a result of only the most valuable work programmes being progressed.

ALSO READ: OGUK forecasts more North Sea divestments

BOUNCE BACK FOR PRODUCTION

The report also sets out positive developments including an expected boost to exploration levels, which hit their lowest point since the 1960s in 2018.

Only eight exploration wells were drilled last year, the lowest number since 1965, however up to 15 could be drilled in 2019 according to the report.

Production is also on the rise, with 619million barrels of oil equivalent delivered last year, a 4% increase on 2017 and a 20% higher than 2014.

Oil and Gas UK said this was mainly driven by the start-up of new fields, including BP’s Clair Ridge west of Shetland.

Meanwhile 13 new fields were approved in 2018, compared to a total of 10 between 2015 and 2017.

Chief executive Deirdre Michie said: “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. 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 cash flow 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.

“In a year in which output from the UK Continental Shelf met around 60 percent of primary UK oil and gas demand, the importance of our hard-fought investment conditions is reinforced – not only for our industry but for the UK economy.

“With the new reality clear and clarity around the future potential, there is all to play for.”

Her comments were echoed by Graham Hollis, senior partner for Aberdeen with professional services firm Deloitte.

He said: “The latest Business Outlook from Oil & Gas UK (OGUK) is clear about the significant pressures that remain on the oil and gas sector and it is right to put this in the context of a “new reality” for the industry.

“Nevertheless, this year’s Outlook does also demonstrate the industry’s ongoing resilience and optimism, particularly evidenced through the improvements in production, production efficiency and new field approvals.

“However, fresh and forward-thinking approaches to collaboration and business models in the oil & gas industry remain crucial to ensuring the UKCS’s competitiveness and longevity as well as supporting that of its critical supply chain mass.”

 

 

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