2017 – A better year for some but certainly not all

Dick Winchester
Dick Winchester
Opinion by Energy Voice

2017 was without question a better year for the oil and gas industry. Going into December with an oil price over $60 and all those cuts to lifting costs coming through means many, but certainly not all operators are making money again.

There are without doubt reasons to be cheerful or at least a lot less pessimistic with an albeit small number of modest discoveries with some operators e.g. Hurricane, making some impressive announcements which should hopefully lead to further activity particularly W of Shetland.

Whilst this is all encouraging stuff I think it’s fair to say that the impact has yet to be felt right across the industry given some companies – especially in the supply chain – are still shedding personnel although thankfully not seemingly in as large numbers as they were during the previous couple of years.

However, it’s not yet clear what’s going to increase the level of exploration. Although the UK Government is coughing up more cash through the Oil and Gas Authority to undertake more seismic related work there would still appear to be a reluctance to start drilling exploration wells again in any meaningful numbers.

Here’s the thing. Because of the turndown in exploration work on the UKCS there is now only a relatively small backlog of both potential and approved development projects. In short, development work isn’t exactly drying up but it is becoming a lot thinner on the ground.

Then there are rumblings of instability within some big players in the supply chain. GE’s share price hit a five year low recently on the news that their recently appointed CEO intended getting rid of a number of its businesses in order to boost its share price.

One business it apparently intends to divest itself of is Baker Hughes which it’s only just bought. That doesn’t strike me as being an indication of GE’s faith in the future of the oil and gas industry.

On the other hand there are some encouraging goings on between operators. Smaller companies like Serica are still buying assets from the big players such as BP. In many senses this is good news because smaller companies tend to be less “bureaucratic”, make decisions faster and so can react faster to changing economic circumstances such as oil price and tax changes. On the other hand smaller companies can often find it more difficult to access the capital needed to fund growth and are less likely to fund R&D although that’s not always the case.

So, it’s been a mixed but generally positive year for oil and gas. Lots of reasons to be relieved rather than content although I still have major concerns with the low levels of exploration being top of my list, the lack of diversification effort coming a very close second and of course at the time of writing, the lack of movement on taxation issues.

Cue the record of the renewables industry in 2017!

First thing to note is that the UN found that during 2016 the level of carbon dioxide in the atmosphere has increased at speeds not seen for more than three million years! As a consequence the World Meteorological Organisation chief Petteri Taalas said “Without rapid cuts in CO2 and other greenhouse gas emissions, we will be heading for dangerous temperature increases by the end of this century, well above the target set by the Paris climate change agreement”.

Against that scary background and with carbon dioxide levels expected to have risen again during 2017 it’s important to consider whether we’re actually doing enough to start bringing those levels down.

The answer is of course “no we’re not”. Whilst a lot of projects have come on line this year including tidal energy and offshore wind farms and these have dominated the news there we’re making very little impact.

For example we’re still building houses that are heated mainly using fossil fuels, we’re still reliant on fossil fuels for transport and we’ve not really made a lot of progress on things such as renewable heat.

Critically we’ve also made almost no progress with hydrogen. I’m not impressed by projects such as Surf n Turf where a tidal energy generator is used to power an electrolyser to generate hydrogen which is then fed to a fuel cell stack. I’m also not impressed by plans to use that hydrogen to power fuel cells that will drive a ferry.

Why? Because we know these things can be done as others have already done them and – more importantly – absolutely none of that technology was developed and manufactured in Scotland and only one element of it was built in the UK. This really has to change if we’re to see any genuine industrial and economic benefit and that applies right across the renewables piece.

However, I am impressed with the EU funded EnFAIT (Enabling Future Arrays in Tidal) project. Why? Because for a change it involves an agile and innovative little Scottish company called Nova Innovation who have developed their own tidal turbine. It makes a nice change from having to import them but the way the UK Government has set up its bizarre “Contracts for Difference” funding application system could result in what few UK and Scottish tidal technology companies there are being “out funded” by their mainly European competitors.

This review wouldn’t of course be complete without mentioning “Brexit” which I sense is going to have a huge and detrimental impact on the energy sector.

The loss of freedom of movement, the threat of tariffs and the inevitable withdrawal from EU energy related institutions and of course the Internal Energy Market will all hit the energy sector hard as indeed will the loss of EU research and development funds.

Will some contractors and particularly manufacturers simply leave and service their UKCS clients from elsewhere? Will the loss of “passporting” lead to some of those banks that help fund the industry moving overseas making access to funding even more difficult? Will tariffs make importing wind turbines, solar cells and other technologies too expensive?

Lots of difficult questions but there’s little doubt in my mind that the overall outcome will be bad.

But hey, have a very merry Christmas and a hopefully successful New Year anyway!