UK Oil & Gas Economic Outlook 2018 revealed an improved landscape for the U.K. offshore oil and gas industry with reduced costs, competitive fiscal terms, improved operational performance and more stable oil and gas prices.

The sector is emerging from one of the most crippling and challenging downturns, and steps taken to date in response to the collapse in oil price have delivered tangible results.

However, even with higher oil and gas prices, cost control and capital discipline remain high on operators’ agendas. The report shows companies indicate that any new investments need to break even at lower prices, often in the region of $40 to $50 per barrel of oil equivalent.

The fact that six major new capital projects have received operator approval in the first eight months of the year, two more than 2016 and 2017 combined, demonstrates the basin’s improved competitiveness, according to the report.

No room for complacency

In recent years E&P companies have focused on business transformation, and they are in healthier positions because of cost and efficiency improvements. However, the report notes that the cash flow position of U.K. Continental Shelf E&P companies will vary significantly, depending on operating costs and investment and production levels. Most of the free cash flow generated in the basin will come from a small number of companies.

The report acknowledged that several challenges persist for supplier companies. It is unknown whether the increased cash flow in E&P companies will translate directly into new investment and much-needed new activity for the supply chain, at least in the short term.

“[While] production remains strong, which is testament to the resilience of the North Sea operators and supply chain, there is a strong feeling across the industry that we cannot become complacent following an uptick in the oil price,” said Shaun Reynolds, partner and head of the oil and gas transaction services team at Deloitte in Aberdeen. “A critical issue persists around the long-term impact of lower levels of exploration and appraisal drilling.

“It is imperative that we preserve the current low-cost environment, but with aging infrastructure and the possibility of a capacity pinch-point in the next few years, that will be a challenge,” Reynolds added. “The industry should continue to incentivize innovative investment and reward those in the supply chain who work smart to maximize efficiencies and results.”

These steps are vital as UKCS fields move through the field development process in upcoming years, Reynolds said, “and, if sanctioned, will be of massive significance to the UKCS and the wider economy, of which oil and gas remain a critical component.”

Threats to industry

Deirdre Michie, chief executive Oil & Gas UK, explained that steps taken by industry, government and the regulator have delivered tangible results, evidenced by the more competitive landscape with improved costs, a predictable fiscal environment, better operational performance and supported by more stable oil and gas prices.

“Solid foundations are in place, and the UKCS is a more attractive investment proposition as a result,” Michie said. “However, record low drilling activity coupled with an ongoing squeeze on the supply chain threatens industry’s ability to effectively serve the increase in activity required to maximize economic recovery.”

It shows that investment conditions remain critical to the long-term future of the U.K. offshore oil and gas industry, she added.

“Choosing the correct direction of travel is critical to securing our shared ambition for the future, outlined in Vision 2035, adding a generation of productive life to the UKCS,” Michie continued. “We have to drive an increase in activity while continuing to find and implement even more efficient ways of working which support the health of supply chain companies while also keeping costs under control.”

Conservative approach

According to Ross Dornan, market intelligence manager for Oil & Gas UK, all evidence shows that investors will continue to favor a conservative outlook because of the ongoing volatility of oil and gas markets.

“Any new activity is positive news for companies across the supply chain, but many still face persistent challenges,” Dornan said. “Revenue and activity reductions in recent years have stretched cash flows and margins, and that has resulted in a loss of capacity.

“Coming from such a low baseline of activity there have to be concerns about the ability of the supply chain to sustainably service an increase in demand,” he continued. “While production performance remains strong, there is a serious concern around the longer-term impact of lower rates of drilling activity.

Dornan pointed to a 50% drop in drilling over the past five years as concerning.

“Allied to this and despite an increase this year, we need to see more capital investments being committed to on the UKCS,” he said. “The competitive foundations are in place, and we must now act and build upon this to support an increase in activity.”

In response, through Oil & Gas UK’s Efficiency Task Force, the industry is focused on driving further efficiency improvements, needed for the basin to remain competitive. Further collaboration and more innovative contracting strategies are examples of this new way of working.

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