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Signs of recovery on horizon for UK offshore sector

Investors taking more positive view as sector gets house in order to cope with $50 crude

In a special focus edition, this week's Upstream hardcopy takes a look at some of the issues affecting the mature North Sea industry as it moves towards its sixth decade of oil and gas production. Read more in the Focus section here and you can access this week's Epaper here.

There are signs that the mature industry, which saw its high costs and a host of other structural problems laid bare when oil prices collapsed from $115 in mid-2014, is turning a corner.

Thanks to changes to the UK’s offshore fiscal regime, a prolonged industry effort to cut its cost base and improvements in the uptime of its platforms, investors in today’s $50-world are now viewing the basin more positively.

Phil Kirk, chief executive of Chrysaor, which is closing in on completing its purchase of a raft of North Sea assets from Shell for $3 billion, says: “People do not see the UK as a toxic area to invest any longer.

“You are now seeing people trying to beat the trend and putting capital to work, and the North Sea could beat the US opportunities.”

Common ground

The trading of assets has picked up pace. Buyers and sellers now appear to be finding more common ground on valuing assets.

Companies are also showing a willingness to employ creative deal structures, for example in which vendors retain the liabilities for decommissioning platforms, to get transactions across the finishing line.

This has smoothed the path for a wave of new independents — some, such as Kirk’s, backed by wealthy private equity funds — to buy up billions of dollars of assets from larger players.

Their entrance is helping fulfil the UK Oil & Gas Authority’s objective of ensuring the “right assets” are in the “right hands” as it seeks to maximise economic recovery of the UK’s remaining reserves.

Other large deals, including Total’s recent $7.5 billion purchase of Maersk Oil, are meanwhile seeing a further shift in the corporate landscape while also challenging sometimes easy perceptions that the supermajors are fleeing the basin.

Deirdre Michie, chief executive of trade association Oil & Gas UK (OGUK) says: “The phrase we have been using is cautious optimism.”

She points out, however, that recovery experiences differ depending on which side of the operator-contractor fence businesses are situated.

Michie observes that at the start of the year some “operators hoped to be able to spend more than their budgets”.

However, that extra spending does not appear to have materialised due to continued volatility in the oil price, which started the year at about $57 per barrel but fell back to about $45 in June.

“I think... as the price dipped... that we could feel the tension again,” says Michie.

“I am speculating, but I wonder whether that stopped a few more optimistic things that might have happened had [the oil price] steadied itself through the [second] quarter.”

Speaking to Upstream in the run-up to the Offshore Europe 2017 conference in Aberdeen, Michie says service companies in particular have been under strain, adding that many are looking towards 2018 and 2019, when they predict more work will arrive.

With an estimated 20 billion barrels of oil equivalent, plenty of hydrocarbons remain to be extracted from UK waters.

In the short-term, production will increase as new projects, all sanctioned when oil was trading at $100, come on stream.

These include BP's Quad 204 and Clair Ridge, EnQuest’s Kraken, Repsol Sinopec’s Montrose Area Redevelopment, Statoil’s Mariner heavy oil development, Premier Oil’s Catcher and Maersk Oil’s high-pressure, high-temperature Culzean scheme, among others.

Bucking a 15-year trend of decline, new field start-ups pushed UK continental shelf production to 1.73 million barrels of oil equivalent per day in 2016, and output is predicted to peak at between 1.8 million and 1.9 million boepd by 2018.

Those increases have come despite falls in capital spending, which is expected to be down 20% in 2017 to between £6.4 billion and £6.9 billion (between $8.3 million and $8.9 million).

Long-term developments

However, as Keith Myers, president of research at consultancy Westwood Global Energy Group, says: “The issue for the North Sea is longer term.

“It is harder to see where the next wave of developments that will support production well into the 2020s is coming from.”

Myers says any future new developments will need to have a breakeven price of $40 per barrel or less.

According to OGUK, only one final investment decision has been taken so far in 2017, by Statoil on its cross-border Utgard project, a tie-back to the Sleipner facilities in Norway. OGUK is forecasting between four and six final investment decisions could take place before the end of the year.

These could include decisions on the early production system aimed at testing the viability of Hurricane’s Lancaster fractured basement field in the West of Shetland area and on Chevron’s Captain enhanced oil recovery scheme, as well as a second development phase at Nexen’s Buzzard oilfield and at Alpha Petroleum’s Cheviot development.

Progress is also being made towards sanction by Shell on the Penguins field redevelopment in the northern North Sea.

Chevron, meanwhile, also continues to look for cost-effective solutions to develop its major Rosebank field in West of Shetland, the final frontier region on the otherwise mature UK continental shelf.

Avoiding the drop

OGUK has warned that all these projects need to materialise to avoid a sharp fall in output after 2020.

Day-to-day operating costs off the UK are forecast to be as low as $14.10 per barrel this year, compared to $30 per barrel three years ago.

Those reductions have been achieved by cutting tens of thousands of jobs and a switch to equal-time shift rotations for many offshore workers, moves that resulted in increases in tensions between employers and the workforce.

An immediate priority is ensuring that costs do not rise as prices rebound. “The big concern is that if we don’t stay focused on cost and efficiency then all the gains we have made and the progress we have made will become unstuck,” says Michie.