The North Sea oil and gas industry can survive the “unchartered waters” of the current crude price storm, at least in the short-term, an analyst has said.
Cost cuts achieved during the last downturn mean 94% of current production is profitable with prices at $25 per barrel, said Neivan Boroujerdi, of energy research consultancy Wood Mackenzie.
But with companies already moving to shrink capital expenditure budgets, the “threat of stranded assets is real”, warned Mr Boroujerdi, principal North Sea upstream analyst.
Most final investment decisions (FIDs) on new projects will be taken off the table this year, while almost two-thirds of development spend could be wiped out over the next five years, Woodmac estimated.
Annual investment in the UK sector could fall below £860 million ($1 billion) as early as 2024, raising the prospect of nearly 6 billion barrels of viable resources being left in the ground.
Offering hope, Woodmac thinks quick-turnaround tieback projects which have already been sanctioned will continue to progress, while a “select handful” pre-FID developments might still get the “green light”.
Mr Boroujerdi said about 3 billion of resources could quickly become viable again if prices recover or further cost reductions can be achieved.
However, the oilfield service sector is unlikely to be able to lower its costs any further, so exploration and production firms will need to revisit their development plans to make big savings.
He said the “quickest win” for producers would be to reduce operational expenditure.
Mr Boroujerdi also expects the sector’s independent E&P firms to struggle financially, especially if banks look to reduce the carbon footprints of their portfolios.
He added that private-equity firms would find it difficult to exit their North Sea portfolio companies, which makes a new wave of investment difficult to imagine.