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Outlook darkens for North Sea oil and gas industry

Outlook darkens for North Sea oil and gas industry


Two oil and gas majors provided votes of confidence in the North Sea last week but these may only provide cold comfort as the outlook for the sector gets ever bleaker.

On Tuesday BP underlined its belief in the exploration potential of the North Sea as it announced that it had returned to profit in the third quarter.

The giant included its successful bid for new North Sea exploration licences in a list of highlights for the three months to 30 September.

BP submitted the bids for the relevant licences before the first wave of the coronavirus triggered a plunge in oil and gas prices that has already taken a heavy toll on activity in the North Sea.

However, the decision to refer to the licences in the results last week suggests the company’s opinion of the acreage has not changed as a result of the coronavirus.

The new boss of BP’s North Sea division, Emeka Emembolu, said last month that the North Sea remained a core area for the firm.

On Thursday last week Royal Dutch Shell announced that the UK North Sea was one of nine basins that it has decided to focus on. Around 20 other areas did not make it into the grouping.

Shell’s boss Ben van Beurden also confirmed that the company expects to remain in the oil and gas business for years.

The comments on the North Sea by Shell and BP may have helped allay concerns about the prospects for the North Sea as the industry grapples with challenges on a range of fronts.

Both Shell and BP have announced big changes in strategy as they bid to reinvent themselves amid the drive to help slow climate change.As they plan to increase investment in renewables significantly while making big enough payouts to investors to keep them onside, their oil and gas budgets will come under pressure.

Some might have worried that the North Sea would struggle to retain BP and Shell’s interest when other majors have made clear they see better prospects in other areas, such as US shale fields.

But any boost to sentiment resulting from BP and Shell’s comments will be tempered by memories of the impact of the last downturn.

After oil prices plunged sharply from 2014 to 2016 as growth in supplies ran ahead of demand Shell and BP retrenched in the North Sea. They sold what were deemed to be non-core assets and shed hundreds of jobs.

The disposal programmes left them with a smaller footprint in the North Sea focused on a few favoured areas.

BP is still in the process of rationalising its North Sea portfolio. The company agreed in January to sell stakes in two big fields to Premier Oil for $625m then accepted a cut in the cash price after the oil price tanked.

Premier subsequently shelved the deal after agreeing to merge with Chrysaor leaving BP wondering what to do with the assets.

BP and Shell’s remaining North Sea portfolios are concentrated in a few areas in which they see most potential, such as West of Shetland.

Any future growth could involve relatively small developments close to existing facilities, which may only result in slim pickings for the supply chain.

Barring a big improvement in market conditions, the prospect of Shell or BP exploring in new areas of the North Sea or investing in the kind of large-scale developments required to open them up seems remote.

The outlook for the market, however, has worsened markedly in recent days.

The price of Brent crude fell from around $70 per barrel in January to an 18-year low of less than $16 per barrel in April after coronavirus lockdowns hammered demand and Russia and Saudi Arabia indulged in a price war.

The price rallied to around $45 after some lockdown measures were eased and major exporters, including Saudi Arabia and Russia, agreed to big production cuts.

However, it has been on an increasingly clear downward trend since late September amid signs a second wave of the coronavirus is engulfing the world. Brent crude sold for around $38/bbl yesterday afternoon.

After completing deep cost cutting in response to the last downturn, some firms may be able to make good money on their existing production in the North Sea at $35/bbl. Whether they will be ready to sanction the investments the supply chain is crying out for is an entirely different matter.

Source: The Herald

Read the latest issue of the OGV Energy magazine HERE.

Published: 04-11-2020

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