13th Jun 2016 13:37
LONDON (Alliance News) - A new report has warned the oil and gas industry in the North Sea faces an unprofitable future if it fails to take immediate and more radical action as the window of opportunity to save the region continues to close.
The report, published by accounting and auditing firm PricewaterhouseCoopers, is the latest to provide a bleak outlook for the sector and said the region only has two years to to transform the region to ensure there is a productive and profitable future.
The report compiled opinions from 37 senior executives in the UK, the Netherlands and Norway working across the industry, government and academia and looked at the wider North Sea region compared to other recent reports which have been focused specifically on the UK North Sea.
There is still optimism in the region, with 58% of respondents feeling positive about the future of the North Sea basin - but a considerable amount, 22%, believe the region is "terminal decline", with the report adding that some of them "meant this in the most literal sense".
However, even those that are optimistic believe the sector needs the right leadership, intervention, collaboration, and innovative strategies for there to be hope for the North Sea in the future.
"From political pressure to cut carbon emissions to the economic reality of low oil prices, the threats to the future of North Sea oil and gas production are real and apparent," said the report.
"While much progress has been made to date in tackling issues such as cost efficiency and implementing recommendations from the 2014 Wood Review, the report believes that any inertia at this pivotal moment could lead to decline at an exponential rate," it added.
The report made some radical suggestions about how the sector could tackle the ongoing issues that have sprouted from the downturn that began in mid-2014, including the creation of a "super joint venture vehicle" to consolidate smaller and fragmented assets in the region under one sole operator to improve cost efficiencies, boost bargaining power and create a more coordinated approach to decommissioning the area.
The theme of collaboration continued as the report also suggested an increased focus on consortium financing in order to reduce risk and to increase the level of lending available to the sector as the traditional providers of capital have retreated as oil prices have declined.
The report also echoed calls for governments and other organisations such as regulators to align their strategies - with respondents claiming it was the second most important need behind gaining access to capital and new technology.
In the UK, that refers to the government, the Department for Energy & Climate Change, and the Oil & Gas Authority, the independent regulator of the sector, tightening their relationships to ensure they meet the needs of the entire sector - from major companies to smaller oilfield service firms.
"The majority of respondents also want [the UK] government to take a lesson from Norway and Saudi Arabia and be bold in setting out their blueprint for the future. This must incorporate onshore activity as well as defining how the North Sea basin will evolve in the short to medium term and, crucially, how the end game - and subsequent transition to a low carbon landscape - will be managed," said the report.
A "change of guard at the top" is essential to the industry attaining its goals as the sector needs to break away from its "we've always done it this way" mentality - and the report suggested the Oil & Gas Authority is the favourite to lead from the front in the UK.
"It's vital that governments and industry come together and agree a blueprint for action. No one company standing alone can weather this but if all interested parties join forces to address the issues then there is hope for the North Sea. Government and industry have started to come together but this can be built on for the future," said Kevin Reynard, office senior partner at PwC.
"While wisdom borne from the past has its place, the sector is perceived as lacking in forward-thinking leadership. It requires a new openness to innovators, entrepreneurs and disruptors. Recent redundancies could see talent leak away and leaders need to articulate the North Sea's role in a low carbon future to attract the next generation," the report added.
Oil & Gas UK posted a report last week that said 120,000 jobs in the UK North Sea will have been lost by the end of this year compared to the peak levels of employment in 2014 prior to the start of the decline in oil prices - predicting there would be 330,000 people employed by the industry at 2016-end compared to the 450,000 in 2014.
Another separate report from the Bank of Scotland echoed similar views and said a third of UK oil and gas companies are expecting to make job cuts this year and also highlighted a real concern amongst firms about the possible shortage in skilled staff in the future as a result.
Although respondents from the UK, the Netherlands and Norway identified some similar key issues, there were differences in priorities and opinions in each nation.
For the UK, access to capital and technology was the key issue whilst respondents from Norway highlighted a greater need for retaining skills in the workforce.
"While retaining skills and talent was a common challenge, it was also noted that a change to offshore shift arrangements in Norway was long overdue: the current rotation model and high wage levels means the average employee cost is currently 85% higher than the UK equivalent," said the report.
"The biggest divergence was from the Dutch: with a focus on gas extraction and recognition that low gas prices are now accelerating the demise of the basin, the industry is anticipating and planning for a move towards decommissioning within the next five to 15 years," it added. "The consensus view was that the next wave of investment in the basin would come from renewable markets such as tidal energy and offshore wind."
Decommissioning is the hot topic in the North Sea due to the basin's mature nature, referring to the need to safely close and dismantle operations once production ceases. Recent reports have suggested anything between GBP17.00 to GBP30.00 billion could be spent on decommissioning activity over the next decade in the UK North Sea alone - sparking fears about premature declines in production but also opportunities for companies, especially larger ones, to capitalise on a new market in the region.
"A government backed decommissioning fund or equity-backed guarantee scheme to help smaller companies cover their letter of credit requirements. With government assuming a degree of risk with the majors, independents can focus on squeezing the last drops of oil and gas from the basin," the report said.
Although decommissioning could be turned to a positive for the region and industry alike, it has also been one of the main causes for the lack of mergers and acquisition activity within the sector that has usually emerged during previous cyclical downturns and been key for companies, particularly smaller firms, to manoeuvre through downturns.
The North Sea basin has the resources to continue producing for decades to come, with an estimated 20.00 to 30.00 billion barrels of oil equivalent left to potentially be extracted, however, the vast amount of barrels are at risk of being left in the ground if the sector can't emerge out of the current price rout.
For example, the Johann Sverdrup field is thought to contain around 1.70 to 3.00 billion barrels of oil equivalent on its own and is, at the moment, expected to begin producing in 2019. It is also one of the assets that BP PLC gained access to last week through its innovative deal with Norwegian firm Det Norske.
"The North Sea opportunity will decline over time and there is now a sense of urgency to create one last cycle of success that can help generate jobs, stimulate growth and ensure security of energy supply," said the report.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
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