Steep fall in oil prices: Britain ponders about profitability of current oil and gas fields
London: One year since Sir Ian Wood, a Scottish businessman best known for his work in the North Sea oil industry with Wood Group completed his Maximising Economic Recovery (MER) Review, the marked reduction in global oil prices has brought into even sharper focus the significant risks facing the UK oil and gas industry.
Responding to the Secretary of State’s commission to assess the impact of the sharp decline in global oil prices on the UK oil and gas industry, Oil and Gas Authority (OGA) Chief Executive, Dr Andy Samuel today published his initial findings and issued an urgent call to action for industry, Government and the regulator.
The UK Department of Energy and Climate Change (DECC) Secretary of State, through the UK Continental Shelf (UKCS) MER Review, and BritishTreasury, through its fiscal reform review, had commissioned a comprehensive analysis on the UKCS well before the current oil price challenges, giving insight and clarity on the serious challenges confronting companies operating in the North Sea.
While the UK remains a substantial producer of oil and gas, and significant potential remains in both the mature parts of the North Sea and across the frontier areas, profit margins are on a steep downward trend, leading many companies to significantly reduce new exploration, infrastructure investment and staffing levels over the past six months.
Dr Andy Samuel’s report identifies the two most immediate risks facing companies and highlights the urgent actions industry, Government and the OGA must take to protect current and future investment in this critical UK sector and sustain the considerable energy security, employment and economic benefits it delivers for this country.
The first risk is that the profitability of our current oil and gas fields will be insufficient to attract continued investment. This could lead to the premature decommissioning of critical North Sea infrastructure and result in valuable oil and gas resources being left the in the ground. The resulting ‘domino effect’ could have a negative impact on all areas of the industry from employment, to supply chain development, to technology innovation.
The OGA will urgently work with operating companies to take steps to protect critical infrastructure and complete rigorous economic assessments of key production hubs to explore the drivers of continued investment including fiscal levers. The OGA will require operating companies to prepare asset improvement plans and encourage a 30% – 40% improvement in operating efficiency. At the same time it recommends companies retain apprenticeship, trainee and graduate schemes, making sure that efficiency and cost reduction measures are sustainable.
The second risk is that a loss of confidence in the future potential of the UKCS could result in the UK failing to secure the critical long-term investment necessary to maximise economic recovery of our North Sea oil and gas resources.