North Sea oil industry future at risk as new projects stall

The North Sea oil and gas industry stands 'at the edge of a chasm', a stark industry report warns today, after a collapse in vital new investment and exploration for new fields.

By The Newsroom Tuesday, 23rd February 2016, 12:00 am Updated Tuesday, 23rd February 2016, 12:00 am

Oil rigs parked in the Cromarty Firth as falling prices spark a slump in North Sea activity. Picture: Jeff J Mitchell/Getty

New projects have all but ground to a standstill raising fears for the industry’s long-term future, according to Oil & Gas UK, with less then £1 billion being spent this year – when this is usually closer to £8bn annually.

About half of all North Sea oil fields are likely to be running at a loss by the end of the year if the slump in global prices continues, with a warning of more job losses.

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The head of the industry body has warned major tax breaks are now needed from Chancellor George Osborne in his Budget in three weeks to kick-start new activity and stem redundancies. Chief executive Deirdre Michie said the North Sea is now entering a phase of “super maturity”.

She added: “While the industry’s decades of experience provide great depths of knowledge and expertise which can be applied to recover the still significant remaining resource, the report highlights the challenges that the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas.”

In the foreword to the report, she wrote: “We are an industry at the edge of a chasm.”

An estimated 60,000 jobs have been lost in the North Sea oil industry in the past year and a half as the global price has fallen from about $110 a barrel to about $30. This has resulted in a fall in costs of about 40 per cent over the past year and these are expected to fall again by about 20 per cent over the current year.

Today’s report focuses on the latest activities of exploration and production companies operating in the UK Continental Shelf (UKCS).

If the oil price remains at around $30 for the rest of 2016, nearly half (43 per cent) of all UKCS oil fields are likely to be operating at a loss, deterring further exploration and capital investment, it warns.

Total capital expenditure fell from £14.8bn in 2014 to £11.6bn last year and is expected to fall further this year to around £9bn.

The key supply chain, which carries out almost all activity in the North Sea, shrunk by a quarter in the last year and is expected to fall further in the coming year as current projects near completion.

“With demand for goods and services falling, ongoing job losses are the personal cost to individuals and families across the UK,” the report warns.

The industry currently pays special taxes at a headline rate of 50 per cent, with some fields paying up to 67.5 per cent.

Ms Michie added; “A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years.”

A UK government spokesman said: “This government is clear that the broad shoulders of the UK are 100 per cent behind our oil and gas industry and the thousands of workers and families it supports.

“We have established the Oil and Gas Authority to drive greater collaboration and productivity within the industry, and announced a radical £1.3bn package of tax measures in the March 2015 Budget to ensure the UKCS remains an attractive destination for investment and safeguards the future of this vital national asset. In January this year, we announced a further package of measures including another £20 million funding for a further round of seismic surveys, and our strategy to maximise economic recovery of the UKCS.”

A Scottish Government spokesman said: “The UK government retains the key economic levers affecting the sector – which is why we have called for urgent action to reduce the tax burden. This survey underlines the scale of the challenges facing the industry, but it also highlights the sector’s efforts to adapt to a low oil price world, with production forecast to increase again in 2016.”

North Sea industry report at a glance

• Industry is expected to approve less than £1 billion to spend on new projects, compared to a typical £8 billion per year in the last five years

• Sector-wide action has pushed unit operating costs down by a third from an average of $29.30/barrel of oil equivalent (boe) in 2014 to $20.95/boe in 2015

• Costs are expected to fall by a further 20 per cent this year to around $17/boe, representing a 42 per cent improvement in just two years

• Revenues fell by 30 per cent to £18.1 billion

• the oil price has fallen by 70 per cent since summer 2014 and the average daily gas price by 20 per cent last year.

• Despite the rise in production to an average of 1.64 million boe per day in 2015, revenues fell by 30 per cent to £18.1 billion.

• Just 13 exploration and 13 appraisal wells were drilled in 2015

• Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further this year to around £9 billion.

• The number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100.

• Reserves reported by companies for potential future development have fallen from 10 to 8.8 billion boe, as projects are deemed uncommercial in the current environment.