Cautious optimism for the year ahead

An oil rig at sunset
An oil rig at sunset
Opinion by Norman Wisely

In the era of Trump and Brexit it’s a risky business trying to second guess what the future might hold, especially when it comes to the UK ‘s often volatile oil and gas sector. There are, however, some developments we can look back on from the last 12 months in trying to assess what might lie in store over the course of 2019.

Despite a number of challenges still affecting the industry, 2018 was a year where we saw green shoots of recovery. While major barriers remain, there is reason for hope in the year ahead.

Firstly the international oil price saw a steady increase over the last year and continues to be relatively stable in comparison to two or three years ago, notwithstanding the recent drop. In the mergers and acquisitions work that I do within the sector, this is perhaps the most critical factor in enabling oil and gas operators to make progress.

The rising crude price has helped stimulate deal flow within E&P with a number of significant transactions actually signing and completing, something which was rare  back in 2016. Many of those deals have been carried over the line through the use of innovative structural approaches addressing issues that had previously prevented transactions from completing. These included closing the value gap between sellers’ price expectations and what buyers were prepared to actually pay given oil price fluctuation and prospects going forward. Innovative means were also developed in addressing buyer financing concerns and dealing with decommissioning liabilities including retention.

Further M&A activity will be essential for the sector in the year ahead as the major operators continue to rationalise their portfolios so they can focus on opportunities which deliver higher value and a greater return. The UK Government’s introduction of measures enabling the transfer of tax capacity in asset deals should also help in this regard.

Over the last year, and indeed since the downturn which began in 2014, the industry has cut its operating costs, a painful process for many. This rationalisation combined with a more favourable UK tax regime has made the North Sea a much more attractive investment opportunity putting the sector in a healthier position going into the New Year.

We are also now seeing the advent of private equity finance going into E&P in terms of asset ownership and Chrysaor, Siccar Point, Ineos, Neptune, Zennor as well as various infrastructure funds appearing to breathe some new life into some mature assets. Should this trend continue it will likely benefit the still beleaguered oil and gas service sector as we make our way through 2019, where I’d hope to see a continuation of recent operator/service company/sub-contractor behaviours in our industry in terms improving the way we work; collaborating, breaking down existing barriers and daring to do things differently.

People like me who work within the sector will also watch with interest where the Oil and Gas Authority will focus its attention in the year ahead as the ever-expanding industry regulator – whilst it has enjoyed some successes in 2018, for every action it takes it will remain the subject of significant industry focus, scrutiny and also, in some quarters, criticism.

Overall we have reasons to be optimistic about the industry’s prospects for 2019 but given the severe unpredictability of so many other geo-political factors, this optimism should be combined with a degree of caution.

Norman Wisely, Aberdeen Managing Partner at law firm CMS