I read with real concern the comments yesterday that the UK offshore oil & gas industry was “close to collapse”.
These comments are over the top for an industry which thinks and plans long term, has significant momentum from current production and from major investments made over the last two or three years, and where the operators make their investment decisions based on the anticipated price of oil in two to three years’ time.
It’s important to have a balanced perspective at this time. The UKCS does face a very difficult year to 18 months which will see a slow down in investment, the loss of some offshore production, up to 10%, and the possible loss of around 15,000 jobs within an industry which employs 375,000, although this is difficult to estimate.
It will be a tough time for the industry and the people that work in it, but we are entering a downturn from which we will recover.
There are structural reasons to believe that the price of oil should recover, probably late 2015 early 2016, and there are reasons to believe that the industry should be in better shape to attract even more investment then because of initiatives currently underway.
The Chancellor’s Fiscal Review, which is ongoing, some of the key details of which were announced in the Autumn Budget Statement last month, contained important, helpful Fiscal measures.
The headline tax rate is reduced by 2% but more importantly, urgent steps are underway to introduce field allowances which will provide incentives for new field developments and capital investment in existing fields and these should be effective. The proposals to stimulate exploration will definitely encourage sentiment towards investment as the oil price recovers. Treasury has given assurances that these will be in place at the March 2015 Budget.
The new Regulator, the Oil & Gas Authority (OGA), will come into existence in the first quarter of next year with significantly enhanced resources and a new charter to facilitate and encourage exploration and new developments through much more collaboration between operators in the UKCS. This is already having an impact on thinking on some new field developments and should produce some early wins in the course of 2015.
The industry itself is undertaking a major efficiency review which should result in a significant reduction in cost per barrel hopefully by the second half of next year.
The Wood Review recommendation for a tripartite agreement between Treasury, OGA and industry means that they will be working together to play their essential roles in helping industry through the downturn and ensuring it comes out stronger on the other side.
There’s also encouragement from the Wood Review that, even in maturity, there are a number of important new plays in the UKCS and there is definitely the potential to recover the additional 15bn-16bn boe that I highlighted during the Scottish Referendum debate.
In the face of the slow-down in investment and inevitable cost cut backs, the industry must use this challenge to become leaner and more efficient and this, together with the actions taken by Treasury and the new Regulator, should enable the UKCS to resume its role as one of the better mature investment regions globally as the oil price recovers.”