UK North Sea is leaner and fitter

The change in lifestyle forced on UK industry by cheap oil has left it looking healthier than it has in years

As practically anyone will tell you, one of the easiest and simplest ways to cut the risk of health problems, especially later in life, is to keep your weight in check. That can be just as true for businesses as for people.

Just look at the ageing UK North Sea, where operators now appear far leaner than they did three years ago, when they were gorging on oil prices of $115 per barrel.

Now on a more meagre diet of oil priced at $55 per barrel, the basin’s operating costs have been cut by half, from $29.7 per barrel in 2014 to $15.3 per barrel in 2016.

They could fall as low as $14.1 per barrel this year, trade association Oil & Gas UK (OGUK) said in its latest annual business report published this week.

Getting to this point has been a painful experience, not least for the tens of thousands of people who have lost jobs as industry readjusted its cost base.

E&P companies have also taken advantage of the suppressed market to strip out expenses in other areas, such as logistics and maintenance, while improvements in platform uptime, increases in production and the depreciation of Sterling against the US dollar have also benefited margins.

The action seems to be working, with the North Sea arena now appearing far more attractive to investors, particularly private equity funds.

“Confidence is slowly returning to the basin,” says OGUK chief executive Deirdre Michie.

“The revival is led chiefly by exploration and production companies, which may collectively see a return to positive cash-flow for the first time since 2013.” However, concerns remain over what proportion of the cost reductions can be sustained, though OGUK believes more than half will be captured for the long term, even when market conditions improve.

Mergers and acquisitions activity, another indicator of health, has also begun to pick up as the valuation gap between buyers and sellers narrows.

Notably, private equity-backed player Chrysaor recently unveiled a $3.8 billion deal to acquire assets from Shell.

Other private equity investors, including Siccar Point, which acquired OMV’s UK portfolio, Carlyle Group, Neptune and CVC Partners, have bid for or have acquired North Sea assets in recent months.

Meanwhile, BP agreed to sell an interest in the Magnus field and Sullom Voe terminal to EnQuest, and integrated energy company Delek Group agreed to buy Ithaca Energy in February in a deal worth $524 million.

OGUK believes more M&A activity could emerge, particularly after the government announced in its budget this week that it will investigate reforms to tax rules covering decommissioning spending that are widely seen as a block to selling North Sea oil and gas assets.

An expert panel will report back in the autumn, though the government will now be under pressure to deliver clarity as soon as possible.

Logically, any deals currently in the pipeline that could benefit from potential changes are likely to be held up as parties wait to find out what the impact of the changes will be.

Overall, through its own action and with help from the authorities, the UK offshore sector is undergoing something of a change in lifestyle.

The recovery may yet take some time, but the future is looking healthier than it did even at this time last year.