Crystal ball gazing is an entertaining but hazardous occupation and let’s be honest, who accurately predicted that a 40% drop in the price of crude oil lay ahead? That said, heading in to 2015 there are certain steps which can be taken to ensure the UKCS is sustainable and competitive on the assumption of a low oil price in the mid-term.
If Chancellor George Osborne wanted to show the energy industry some genuine New Year resolution he would without delay consider further tax cuts. The North Sea industry is not going to end tomorrow, contrary to the hysterical declaration of some pundits, but the new landscape in which we operate has brought in to sharp focus the question of why the tax burden remains so high. Contrast this with other industries which have had ongoing support, for example the initiatives to reintroduce car manufacturing in to some UK regions, and it’s little wonder E&P companies feel aggrieved. Successive governments have failed to understand the requirement for a mature, long-term energy policy, instead taking a short-term view involving regular tinkering with tax rates. I would hope that has now come to an end and Mr Osborne will take a more progressive approach in 2015 to show support for what is one of the country’s most important industries.
The big challenge in the months and years ahead is in ensuring we continue to have sustainable domestic production which allows us to continue to develop a supply chain which is relevant and world class. One of key themes to emerge from the Wood Report was the need for greater collaboration, and while there has been well-meaning and wide ranging statements of good intent, that must be transformed in to action.
Looking back over recent years – always easier than looking ahead – it could be argued too much focus was put on the massive numbers being spent on capital expenditure, with less attention paid to efficiencies. Historians may look back and take the view this price collapse was in some ways fortunate, as there is nothing like a seismic shift to focus the mind and bring about change.
The new industry regulator, the Oil and Gas Authority (OGA), has to play a central role in working together in 2015 ‘for the greater good’. There is certainly an eagerness from the industry to become engaged with the OGA, but that is hampered by practical challenges, with the required legislation still to be passed by Parliament and the recruitment of Andy Samuel’s team to be completed. The Government is doing what it can, but it is imperative that the OGA is up and running as quickly as possible and using the powers envisaged in the Wood Report for the benefit of all engaged in exploration, production and decommissioning.
With such a dramatic drop in the price of any commodity, there will be winners and losers. In 2015, we will undoubtedly see more consolidation, with mergers and acquisitions coming to the fore in the E&P sector. The more prudent players who have built up cash reserves or have a very strong balance sheet, will be by definition, in it for the long game and will in this next 12-24 months be eyeing up opportunities. Those facing a more torrid time are the companies with a high level of gearing or weak cash flow, and they are at risk of becoming potential targets.
The international ownership of the UKCS is constantly changing and in recent years we have seen first time market entrants from China and Hungary. Global investors can justifiably continue to take a keen interest in the North Sea if they are confident we have in place a strong regulatory and fiscal framework which protects investment.
There has been speculation that a lower oil price makes it less attractive to pursue other energy sources but that view is short-term and short-sighted. We need a balanced energy mix to ensure continuity and security of supply and this is not the time to ease up on the development of alternative energy sources.
While the oil price is a concern, let’s not forget the global demand for oil and gas remains high and we still have significant hydrocarbon resources in the UK, backed up by a world-class supply chain. You don’t need a crystal ball to predict the UK will continue to be a significant producer of oil and gas for the foreseeable future, provided all stakeholders work together towards that common goal.
Bob Ruddiman is the head of Energy & Natural Resources at legal firm Pinsent Masons.