It is no secret that the UK oil and gas industry has faced troubling times so far this year, with the price of Brent oil reaching lows of $28/bbl and thousands of jobs lost. Last week, Oil & Gas UK released its annual Economic Report, acting as a reminder to all of the significant challenges facing the industry – some of which are detailed below.
Few industries could have survived the turmoil of the last two years and as companies in the basin continue to position themselves for survival in a long-term low commodity price world, there are some positives to be taken:
- With total expenditure being cut, industry has chosen to focus on improving efficiency and signs of resilience were shown with average unit operating costs cut to $16/bbl, down 45% since 2014.
- Last year the basin also saw its most successful exploration performance since 2008, in terms of commercial discovered resources
Despite these improvements, substantial challenges face the basin – albeit not unexpected:
- Even though production is expected to rise again this year, 2016 will be the fourth consecutive year of free cash-flow deficit, with expectations of around -£2.7 billion. This reaffirms the major financing challenges facing many companies and has led to many increasing their net-debt positions in order to maintain existing operations.
- Rising levels of debt will also have a domino-effect on investment as, should prices recover, companies will typically deleverage before applying fresh investment to the basin which is already worryingly depleted (<£100 million of fresh capital committed to greenfield projects in the basin so far this year).
- Reserve replenishment ratio on the UKCS fell to 0.25 in 2015 as volumes produced were four times higher than new volumes discovered.
- Finally decommissioning expenditure continues to grow, where in 2015, 21 UKCS fields ceased production when only 14 were anticipated at the start of the year.
Moving forward, hopes are that the Oil & Gas Authority will begin to impose more of an influence, in a bid to promote collaboration and asset stewardship to help with the Maximising Economic Recovery initiative. Some interesting proposals for change have been made in terms of alleviating the tax relief mismatch between ownership when trading mature assets and improving access to finance by allowing investors to trade their tax loss positions for a cashable tax credit – however, whether these calls are met remain to be seen as the industry is currently a burden to the tax payer, generating negative tax revenues of -£24 million, over 2015/16.
All told, the UK oil and gas industry has shown its flexibility and resilience over the last two years. With hopes that the market has hit bottom, companies have positioned themselves to become more adept at survival in a low price environment. However, as always in our ever-changing industry, more must be done, as the current scenario is unsustainable.
Further insight will be available in Hannon Westwood’s UKCS October Monthly Report on HW Atlas
Fraser Wilson, October 2016