2015 was unquestionably the UK North Sea’s “Annus Horribilis”, or at least thus far.
The year started badly, perked up a bit, but then ended terribly.
2015 was not the way for Aberdeen to celebrate 50 years of involvement and begin its second half century of engagement with Big Oil as it was clear from the outset that the North Sea was in for a rough ride.
And what a ride it turned out to be, to the point that doubts began to re-emerge as to whether there will still be a credible upstream UK oil & gas oil and gas presence come 2020, let alone 2065 when 100 years of the industry would be clocked.
Back in 2014 before the latest oil price crisis started and buoyed by $100-plus oil and talk of tightening global supplies, there were those in the North Sea community who dared to talk of another 25 years and more, as indeed there will be, if only by dint of BP’s growing success with the huge West of Shetland resource that is Clair, and Statoil’s boldness in committing to the Mariner heavy oil development, a resource that others had given up on.
Both Clair, now in its second phase of development with a third phase still under active discussion despite the current oil price crunch, and Mariner are in any case long-term developments and pretty much guarantee that Aberdeen will still host activity 30, 40, 50 years out.
What other production might be coming from offshore UK by then will depend upon multiple factors, not least global warming and the drive towards green energy, though 2015 saw the Cameron government damage the UK’s push with its scrapping of support for onshore wind and solar and the possibly illegal axing of community renewables support.
Another critical factor is government policy which has been far from consistent except in one regard; the UKCS has until recently been regarded as a “milch cow” by HM Treasury.
Indeed, the role of government is crucial and perhaps, for the first time in the entire history of the UK Continental Shelf, there is at last a willingness to reasonably systematically oversee the maximising of economic recovery and really promote the immense value of the oil & gas supply chain’s capabilities overseas, notwithstanding that much of it is in foreign ownership.
How permanent … or transient … that turns out to be hinges on politicians, Civil Service, the industry itself and, in the context of global warming, public opinion.
Notwithstanding the current slump, for the time being the signs are reasonable and one of the key drivers for change is the suite of recommendations set out in the Wood Review, which was commissioned by government in June 2013 and published in February 2014.
One of the cornerstone recommendations was to set up an arm’s length regulator. This would develop an over-arching strategy for maximising economic recovery (MER) from the UKCS by adopting a cohesive tripartite approach in conjunction with HM Treasury and Industry.
The Oil & Gas Authority’s CEO, Andy Samuel, officially took up the reins on January 1, 2015.
A year on and it looks as if a highly experienced team is being put together at the OGA, the headcount is predicted to get to around 160/170.
From the outset, Samuel came across as straightforward, open and honest enough to say that that he most certainly does not have all the answers. He also made it clear that the OGA would facilitate where it can but that it was for the industry to deliver.
Despite being vested with the authority to bang heads together to make things happen in the North Sea, Samuel and his team will have to carry the industry with them … earn that collective buy-in that can only come from being effective and fair; consensual yet tough when necessary.
A year into office and it’s pretty clear that the OGA is having an impact … a positive impact. It does appear to be getting to grips with the critical issues that confront UKCS operators … with the exception of oil price of course.
Three examples where the Samuel team is beginning to have that hoped for impact are the need to protect critical infrastructure, driving up field productivity and commissioning the only UKCS seismic survey funded by the public purse.
It was in February that the OGA highlighted the risk that low or negative profitability in producing fields could lead to the premature decommissioning of critical infrastructure, with the potential to shut down whole areas of the UKCS, stranding valuable resources.
Operators and co-venturers across the UKCS had apparently asked the OGA to help facilitate their commercial discussions and assist in developing area solutions that could work for all parties.
Early discussion targets included the Theddlethorpe Gas Terminal in Lincolnshire and Sullom Voe Terminal on Shetland.
In March, OGA brought together the managing directors of the top 10 oil and top 10 gas producers to present their stewardship improvement plans and discuss production efficiency opportunities. Stewardship is one to the cornerstones of the Wood Review MER UK recommendations.
Samuel had hoped that the OGA would publish a comprehensive enhanced stewardship strategy before the end of 2015, though this appears not to have made the public domain at the time of writing (December 30).
On the other hand, in December, the Authority did publish some pretty fundamental stuff as to why wells drilled in the Moray Firth and Central North Sea all too often fail. Key conclusions of the 208-page report include that: the lack of quality G&G (geologic & geophysical) work, ineffective peer review, and inconsistent de-risking were key points in a number of well failures; the importance of doing more regional play based work for setting and context were repeatedly missed; several of the prospects relied too heavily on seismic anomalies; regarding the Moray Firth it was observed that the quality of seismic was generally poor.
Staying with seismic, and perhaps it is the best example of the Authority delivering, is implementing the first ever publicly financed North Sea seismic survey. Commonly applied by the likes of the Norwegian government, the very idea that the State should dip into its pocket for such an activity had hitherto been anathema to UK governments.
The £20million programme, completed by WesternGeco in October, acquired almost 20,000 line km of new 2D seismic lines over an area of 200,000 km2. The latest seismic acquisition and processing technologies were used to enhance subsurface imaging to help improve understanding of the geology and potential prospectivity.
This could do much to help restore interest in the UKCS, if not now then at some point in the future when oil prices recover to a level that might reignite UKCS exploration.
The foregoing examples of early OGA work are surely a huge improvement on the hitherto shambolic management of the greatest UK industrial success story since World War Two by a succession of governments of varying political hues, plus government departments with revolving door energy and Treasury ministers, especially since the turn of the millennium.
Mentioning HM Treasury, as promised on December 4 2014, it did indeed make a set of concessions to the industry in the UK’s 2015 Budget. Core was cutting the tax burden, albeit the reduction was a lot less than it should have been. Indeed, look out for Energy Eye in the first 2016 edition of Energy publishing on January 11 for our view on what the Treasury must do regarding North Sea taxation.
Another key measure to come out of the 2015 Budget was introducing a UKCS-wide allowance to replace the complex set of ‘sticking plaster’ concessions made in the wake of the disastrous Tory/Lib-Dem tax raid of April 2011, which backfired on the Treasury and deeply angered the North Sea establishment.
The £1.3billion 2015 Budget package of measures, modelled to incentivise £4billion of additional investment with a relative increase in production of 15% by 2019-20, has probably been rendered ineffectual … too little too late … by the now deeply depressed offshore sector.
Mention must of course be made of the General Election and the manner in which the political landscape of the Scotland and the wider UK, not forgetting the Westminster Parliament, was transformed.
It’s not just that SNP achieved a landslide in Scotland, or that the Tories unexpectedly clearly won the day in Westminster. PM Cameron and chancellor Osborne thereby re-securing their jobs, but that around one third of the latest crop of MPs are women, of whom several were rapidly allocated to key appointments, including at the Department of Energy & Climate Change. Amber Rudd was made secretary of state, whilst fellow Thatcherite Andrea Leadsome was appointed minister.
Both had logged relevant experience in junior roles under the prior (coalition) government; the former in DECC and the latter at the Treasury.
Both also had a City-related past, having worked in banking, which therefore should help provide them with a deeper understanding of how upstream oil & gas is financed (and taxed) than many of their predecessors.
One of the ironies of the Rudd appointment was that it was welcomed by the Green Party even though she was known to favour onshore shale oil & gas extraction, including in National Parks.
She was reported by the Press and Journal shortly after being appointed as saying: “The North Sea is an important UK economic success story and one of my priorities will be to work with all parties to ensure a strong industry that continues to support thousands of Scottish jobs.”
Rudd has since continued to make positive noises about North Sea and is clearly an advocate of nuclear power, plus shale gas extraction.
But she quickly betrayed her supposed green credentials by toeing the line on what I believe to be the Treasury’s decision to slash subsidies for onshore wind and solar, plus community renewables projects.
Defending DECC’s position on June 22, Rudd claimed the early end to onshore wind subsidies would protect consumer bills and help cut the costs of other renewable technologies,
Addressing Parliament, she said that the UK had enough onshore capacity already deployed and in the pipeline to meet renewable targets and confirmed that she expected the subsidy change to stop the build of around 250 planned wind farms (2,500 turbines aggregate number).
She said: “We require 11-13GW of electricity to be provided by onshore wind by 2020 to meet our renewable electricity generation objective while remaining within the limits of what is affordable.
“We now have enough onshore wind in the pipeline, including projects that have planning permission, to meet this requirement comfortably. Without action we are very likely to deploy beyond this range.
“We could end up with more onshore wind projects than we can afford – which would lead to either higher bills for consumers, or other renewable technologies, such as offshore wind, losing out on support.
“We need to continue investing in less mature technologies so that they realise their promise, just as onshore wind has done.”
Stepping back a month, and on May 21, Leadsom was in Aberdeen to meet with the North Sea’s leadership, including Deirdre Michie, who has just secured the top job at Oil & Gas UK, Malcolm Webb having announced his retirement.
Leadsom played on her 25 years in banking and finance prior to entering politics, saying there were “common threads” between the energy and finance sectors.”
Nonetheless, she told the P&J: “We will be committed to decarbonising. But at the same time we are absolutely focused on jobs and growth.”
Leadsom was also complementary of the OGA, adding: “It is quite refreshing to see a regulator whose focus is on actually maximising the benefit of their sector rather than just pushing them around.”
This will doubtless have pleased and perhaps even relieved Samuel, who is of the industry anyway, being ex BG Group, as are many people already with or hoping to be recruited by the still new regulator.
Quite clearly, the North Sea must be spared any more revolving door, poor quality management and fiscal decision-making by government, whether through DECC or, for that matter, Treasury. But one wonders how long Rudd and Leadsom might last, especially the former.
The next five years are ultra-critical for the old energy cash cow and stable oversight by government is a must. De facto, this means establishing trust and that comes only through actions and over time.
The hope has to be that Michie can strike up a decent working relationship with this partnership of a kind that really can deliver positive results based on a constructive, consensual way of working.
Perhaps it will help too that a significant number of women have shot to the top of the UKCS oilco management league table in recent times.
The latest recruits to the top drawer club include Tove Stuhr Sjøblom who now heads Statoil’s UKCS business and Elizabeth Proust, who took over the reins at Total in Aberdeen from Philippe Guys, who has retired and returned to France to establish a vineyard in Brittany.
They are part of what has become something of a changing of the guard among North Sea leaders; people like Jim House of Apache who was recalled to Houston HQ mid-year and BP’s Trevor Garlick, who has just retired.
Appointments such as Michie, Proust and Sjøblom are important, not just as a gender balancing exercise, but mark a welcome dilution of UKCS boardroom testosterone.
And by heavens have they got their work cut out in an industry still characterised by chauvinism, even if unintentional.
In Michie’s case, that also means demonstrating to the UK offshore industry … from the largest investors and producers, right down through the supply chain … that she can lead and get results.
The start point for Michie demonstrating her mettle was OGUK’s June conference where she was very much to the fore in getting key massages across about the strategic value of the North Sea and of its supply chain globally..
“Here in Aberdeen and throughout the UK, from Teesside to Truro, from Aberdeen to Anglesey, we have built an industrial powerhouse for the UK – the offshore oil and gas industry,” she said in her opener.
“In terms of our economic contribution and value to the country, this industry stands head and shoulders above the rest. We have paid more to the Treasury than most other industrial sectors, we generate hundreds of thousands of skilled jobs, we have a vibrant supply chain, at home and abroad, and make a key contribution to the UK’s security of energy supply. It is an industry that has grown and evolved for 50 years.
“However, we now face real and present threats that are challenging our future. At $60 oil, 10% of our production is struggling to make money and there is a shortage of capital and a shortage of investors willing to place their money here.
“While demand for our products remains strong, critical for our transport and heating our homes and giving us a whole host of everyday products, our productivity as an industry has fallen – and fallen rapidly.
“In relation to our escalating cost base, we know that as an industry we have been part of the problem; now we need to be part of the solution.
“Over the last 20 years, the price has averaged $62 per barrel and the forward curve is between $65 and $75. Therefore it is not unreasonable for the North Sea to set out its stall at being sustainable in a $60 world.
“As a target, it’s one that we as a trade association can champion, Government can align with and the regulator can pursue as an enabler, for example, to focus on key infrastructure.”
Michie called for a change in mind-set: “To succeed with this approach, we have to be open to change. We must avoid doing the same things in the same way and expecting a different outcome.
“We have had a decade of escalating costs, so we can be sure that our current approach doesn’t work. We need to think about this from an investor’s point of view. Given that we compete for investment dollars on a global basis, we must ensure the UK is a commercially attractive and predictable place in which to invest.
“Learning from our mistakes, we know that our focus cannot merely be on ‘cutting costs’, but must more fundamentally address the efficiency of the basin.”
The North Sea is unquestionably in difficulties. As alluded to by Michie at the OGUK conference it had problems when oil, was at $100 without the latest and prolonged price downturn exerting further severe pressure.
Brent started 2015 at $57.54, dropping to $46.670 on January 13, eventually recovering to $67.58 by May 5, since when it has slithered to new lows, logging $37.57 at close on the last day of the year. Compare that with $115 or so in June 2014, before the slide started.
BP’s Trevor Garlick reminded the Energy Jobs Taskforce launched by Scottish Enterprise in January and which conducted a day-long workshop on May 22 that, according to OGUK research, 55% of North Sea production capacity would be rendered non-viable if the oil price dropped below $55 per barrel.
On that basis, easily the majority of North Sea output lost money during 2015 even allowing for the fact that, for around five months, the price was above the $55 referenced by Garlick. That the industry was also flabby and out of condition as a result of the unprecedented long-running oil price boom did not help its situation.
Perhaps one way of encapsulating where the UK North Sea seems to be today and roughly headed is to pick over Oil & Gas UK’s Activity Survey 2015, published on February 24.
It provided “striking evidence of how rising costs, taxes and inadequate regulation had taken their toll on the UK industry’s international competitiveness”.
Former OGUK CEO Malcolm Webb, then still in post, said the survey painted a “bleak picture yet also demonstrated clear potential for the future”, so long as the right actions are taken by the industry, by government and by the OGA.
Webb warned in the review and not for the first time: “Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground.”
The survey reported that 6.3billion barrels oil equivalent (boe) were at the time sanctioned or under development. There were another 3.7billion boe of potential investment opportunities, although companies indicated at the end of 2014 that less than 2billion boe of those notional barrels were likely to be developed.
The current guesstimate is that it could cost £90-100billion to extract that roughly 10billion barrels prize.
OGUK’s 2015 report pointed out that operating expenditure rose nearly 8% to £9.6billion lin 2014 and, on a unit of production basis, reached a record high of £18.50/boe.
Falling oil prices meant that revenues fell to just over £24billion for 2014, to that point the lowest since 1998 (the year before oil output peaked), and this, combined with rising costs, resulted in a negative cash-flow of £5.3billion for the basin, the worst since the 1970s.
Annual investment in sanctioned projects alone was forecast to decline rapidly and could collapse to £2.5billion by 2018.
Today, at the end of 2015, this forecast is probably too optimistic, given that there are no signs of the current oil price crisis easing. Indeed, it seems likely to deepen based on current fundamentals.
Webb pointed to the terrible health of the industry by saying: “Even at $110 per barrel, the ability of the industry to realise the full potential of the UK’s oil & gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation. At current oil prices, we now see the consequences only too clearly.”
And that is why cost and efficiency improvements of up to 40% are being sought to enable survival of the UK North Sea industry. Even 15% would be a huge improvement and, according to Aberdeen University’s renowned petroleum economist, Professor Alex Kemp, could have five times the leverage in terms of improvement than a 10% reduction in Selective Corporation Tax.
Some companies like the US independent Apache have been working the challenge successfully, witness remarks made by its North Sea chief Cory Loegering on December 8 at an OGUK breakfast.
On a morning when Brent was trading around $40, he said it was possible to make money from the UK sector despite the state of oil markets.
He said the company’s North Sea business centred on the mature Beryl and Forties fields was both competitive and delivering high rates of return.
Moreover, it had lately been boosted by significant drilling successes on Beryl; indeed the two latest local discoveries were described as “exceptional”.
Despite their age, Loegering pointed out that Beryl and Forties remained two of the most prolific North Sea hydrocarbon accumulations and not only that as they ranked best in class for production efficiency at about 92%.
He said too that Apache enjoyed “industry-leading operating costs in the North Sea; indeed, the company had a “50% operating cost advantage”.
“Our operating costs are half the UK average and will come in below $14 per barrel this year,” said Loegering, pointing out that making the effort to achieve top quartile production efficiency really did deliver lower operating costs.
In 2014, Apache achieved a unit operating cost of $16.66 per barrel versus the UK average of $30.49 at that time.
He pointed out too that, with 84 drilling targets currently listed for drilling up on Forties and about the same again for Beryl, there would be no let-up in drilling into and bringing hydrocarbon pockets onstream.
Meanwhile, the industry is haemorrhaging jobs; 5-10,000 had already gone UK-wide by mid-June, or so it was said at the time.
The latest guess is that an estimated 65,000 jobs, almost one-fifth of the total upstream oil & gas industry workforce in the UK, have been shed in the last 18 months and almost 50 global projects, worth $200billion have been shelved.
Most of the damage was done during 2015 and perhaps the most hurt company of all in terms of lay-offs is OGN of Wallsend upon Tyne where 2,500 jobs have been shed as the order book has been decimated.
Worst affected centre is clearly Aberdeen where estimates range as high as 20,000 jobs apparently axed.
Supply chain companies are being sent to the wall by their investors … like well construction specialist ADTI (Applied Drilling Technology International) for example. It had been bought off Transocean Drilling by P/E company Sun European Partners during H1 2014 and was summarily shut down in May. Others have suffered similar fates or been sold on for the symbolic £1.
Major consolidations are inevitable and, in some instances, desirable. This is a perfect environment for large service companies to mop up weak SMEs and for mega-mergers, such as the $15billion merger announced between Schlumberger and Cameron.
This follows the Halliburton/Baker Hughes merger announcement in November 2014 but which is still not completed.
While widespread consolidation has not yet been forthcoming, according to EY, “well capitalised strategic corporates have been completing bolt on acquisitions to facilitate entry into new geographies, diversify technological offerings and fill gaps in product portfolios”.
They include DistributionNow’s acquisition of MacLean Electrical Group, Proserv’s acquisition of Nautronix and Rotork’s takeover of Bifold.
In December, it finally emerged that private equity group Arle Capital was selling Stork Technical Services to American company Fluor for €695million. Fluor plans to merge its operations & maintenance units with Stork, creating a new company with a workforce of some 19,000 and annual turnover of over €2billion.
In addition, UK corporates have continued to selectively expand internationally, especially Wood Group, which recently acquired Infinity Group, a US construction and maintenance contractor focused on the Texas Gulf Coast.
Joint ventures seem to be back in vogue, most recently including FMC and Technip forging Forsys Subsea and Petrofac and McDermott entering into a strategic marketing alliance to jointly pursue opportunities in the deepwater subsea, umbilicals, risers and flowlines sector.
But what there hasn’t been is a mega-merger between petroleum majors, though they have been touted. The best that the writer can come up with for 2015 is Shell making a meal of mid-ranker BG Group in a deal worth $60billion.
Some Shell shareholders believe the company is paying over the odds for BG because the deal was agreed in April on the assumption that oil prices would recover to $90 a barrel by 2020.
The super-major has so far held firm on its intention despite growing doubts about how realistic the target is. So maybe 2016 will deliver a different outcome to the one expected. Who knows?
One thing is for certain. If you thought 2015 was tough, try 2016. On the other hand, as more and more people and companies dependent upon the North Sea get the bit between their collective teeth, it is not impossible for the impossible to become entirely possible!