2017 is a crucial year for the UK oil and gas industry and its supply chain. Two years of consolidation and cost efficiency has put the industry on better footings, and now a steady upturn in oil prices in Q1 of 2017 has brought about new-found optimism.
As Deloitte’s 2017 outlook on oil and gas explained, “OPEC finally announced production cuts of 1.2 million barrels per day in 2017, and rig counts growing, albeit slowly, once again. There is a sense that better times are ahead.”
There is already evidence of this shift in mentality, as recorded by Oil & Gas UK in their latest Business Outlook 2017 report. Together with these findings, we’ve compiled a list of recommendations that the industry should look to achieve this year in order to make 2017 the most successful year it can be.
Keep an eye on the North American market
Following an agreement to restrict global output at the OPEC meeting in Vienna on 30th November 2016, Brent oil prices moved to $53.6/bbl in December – the highest monthly average since July 2015.
Despite the leap in prices, the UK oil and gas industry should keep an eye on North American shale production levels which are anticipated to increase in 2017, a move that will bring down the oil price slightly towards the end of the year – according to Oil & Gas UK.
This sudden drop in bbl may have an impact on UK-based exploration and production (E&P) companies especially, who are still striving for cost savings in order to invest in new fields. But with a stronger financial footing established for the long term, companies should still continue with exploration projects on the ever-maturing UKCS, providing the US shale outputs do not distort Brent oil prices too much.
Invest in new field developments
2016 saw a flurry of new field activity with 14 exploration wells drilled in 2016 in the UK Continental Shelf – representing the first increase in activity since 2012. Combined volume discovered hit 360 million barrel of oil (boe) which was more than any other year since 2008. This year, Oil & Gas UK anticipate 16 new exploration wells will be drilled on the UKCS symbolising another positive step forward for the industry.
New explorations in 2017 have been stimulated by the UK Government who have pledged resources to increase cross-industry learning, but more importantly, pledged finance to obtain better data on the UKCS’ geology and create a more flexible licensing scheme. The new licensing scheme was created to make it easier for operators to pitch for new exploration fields – so far this change has attracted 29 applications from 24 companies.
Operators should ensure that they take advantage of the Government’s support in order to invest in new explorations and developments. We all know the UKCS is a maturing basin, so action to extend the basin’s life while the going is good, is a requirement, regardless of whether that is done through new explorations or extending the life of ageing assets.
Sustain a steady increase in production
Since 2014, the UKCS achieved something which hadn’t been done in the ten years previous – it increased production levels. In two years, UKCS production has increased by 16%, taking levels to 630 million boe.
While strong performances from the Laggan and Tormore fields in the North Sea drove the production increase, new field developments contributed 39 million boe, an increase of six million compared to 2015.
As well as showing the important role that investment in new field developments have had, and will continue to play in 2017, operators should continue to strive for increased production efficiency on their existing assets in order to steadily increase production over the next 12 months also.
Look to grow market share abroad
Exports are expected to account for 43% of supply chain turnover in 2017 according to the Oil & Gas UK, and industry thought leaders are supporting the move for businesses to do more. As we featured on our blog in February 2017, the UK Government has made it a priority for their Department for International Trade to help UK firms sell overseas, following the UK’s decision to leave the European Union.
The recent oil price decline, combined with the end of an investment cycle in the UKCS, resulted in “domestic revenues [falling] more sharply than those gained through international business” – according to Oil & Gas UK.
To combat the fluctuations in investment figures in the UKCS, this call to ‘go global’ ensures the supply chain has a reliable revenue stream beyond the regional market.
Embrace more mergers and acquisitions
The UK oil and gas industry still needs to continue to strengthen its position by increasing output and production efficiency. Operators have embraced merger and acquisition deals to do this, but have also handed over ageing assets to smaller operators.
Shell, for example, agreed a $3 billion deal with Chrysaor in 2016 that saw a number of its assets transfer to the private equity-backed independent operator. Chrysaor, just like many other independents, has focussed their attention on maximising economic recovery during their field’s late-life – securing reasonable revenue levels for them, and helping contribute to the UKCS’ production levels. This additional activity may never have happened under Shell, symbolising the impact acquisitions can have.
Oil & Gas UK has said there is “speculation” that more mergers and acquisitions will emerge in 2017, symbolising a “strong vote of confidence in the basin”, and these deals should be embraced.
Prepare for the decommissioning bill
While ageing assets are being resurrected under independent operators, the UK oil and gas industry will still need to deal with the issue of decommissioning ageing assets on the UKCS.
“Impressive” cost and efficiency improvements have delayed cessation of production on many UKCS assets, according to Oil & Gas UK, meaning decommissioning activity has only “steadily” increased. Nevertheless, the cost of decommissioning in 2017 is expected to top £2 billion.
The figure is only set to rise further with up to 40 fields expected to cease production between 2018 and 2019 – similar figures to those published by Oil & Gas UK in December 2016 in the Decommissioning Insight’s Report. While confidence in the UKCS production levels is increasing, it shouldn’t sway operators away from the amount of decommissioning projects that need to be completed soon.
The Decommissioning agenda is also something that is being driven forward by the Oil and Gas Authority. OGA’s Decommissioning Strategy describes their role and expectations, providing a clear direction to achieve three key priorities: Cost certainty and cost reduction, supply chain capability and capacity, and scope, guidance and stakeholder management. These priorities will help the UK influence the global decommissioning market.
Will the UK oil and gas industry achieve these?
The industry has been quick to respond to the downturn, making tough decisions on mergers, cost savings and streamlining their workforce. The next step is to return to relative profitability and success, and the six key recommendations above among others will help operators and the supply chain do this.
As of March 2017, there are signs that the UK oil and gas industry are well on their way to embracing the new-found optimism in the industry. Findings by McKinsey have already found that there are “longer-term signs of growth, with 2017 capex budgets up, and more tenders now appearing – signalling a possible upturn by the end of 2017.”
The UK industry will hope that this optimism will continue through this year and beyond.