Firstly, a caveat: as this issue hits the newsstands, there is an outside chance that Jeremy Corbyn will be on his way to Buckingham Palace to pick up the keys to No. 10 Downing Street. If this scenario plays out, within a few short months his next-door neighbour will levy an £11bn windfall tax on North Sea oil producers to help fund the fabled “green industrial revolution”.
Deirdre Michie, chief executive of trade association OGUK, said that “any increase in tax rates affecting our UK activities will drive investors away and damage the competitiveness of the UK’s offshore oil and gas industry. This tax has the potential to affect security of energy supply for the UK and increase our reliance on imports, effectively passing the buck for production emissions to other countries”.
Presupposing that Mr Corbyn is unsuccessful in his bid to assume control of the means of production, it would be instructive to assess prospects for the UK’s offshore industry as we hurtle towards a zero-carbon future.
Valuations for upstream production companies, along with oil service companies, have declined over the past year, partly a consequence of flatlining natural gas sales, but also because oil markets entered a period of uncertainty in the second half of 2018, forcing Opec to reinstate a cut agreement. This helped to stabilise prices, although the S&P Oil & Gas Exploration & Production index is down by 35 per cent from its reading 12 months ago. The sector has started to lose its allure for many investors and near-term prospects aren’t favourable, as the US Energy Information Administration forecasts that the average Brent crude spot price will drop to $60 a barrel next year, a 6.7 per cent decline on 2019.
The easy assumption is that the capital needed to prop up the industry is in short supply because of the undertakings agreed by nearly 200 nations at the 2015 Paris climate summit. Investors also need to take account of the accelerated roll-out of environmental, social and governance (ESG) mandates and warnings by central bankers over the risk of stranded assets. Surely, industry decision-makers must be about to call time on North Sea projects, some 45bn barrels and 50 years on from ‘first-oil’ in the region.
Capex commitments and exploration success
The evidence suggests otherwise. Climate campaigners are up in arms over plans by industry heavyweights such as BP (BP.) and Chevron Corp (US:CVX), to sink £6.78bn in to six major new projects in the North Sea. France’s Total SA (Fr:FP), which has increased its offshore exposure through its £5.8bn acquisition of Danish company Maersk Oil, has earmarked another £10bn for North Sea projects over the next five years. Norway’s Equinor ASA (Nor:Oslo) may have changed its name from Statoil to underline its “development as a broad energy company”, but it still recently started production at the 300m-barrel Mariner field, 95 miles east of Shetland (Greenpeace and Friends of the Earth are taking Norway’s government to the country’s appeals court over the award of 10 new exploration licences in the Norwegian Arctic).
The increased investment commitment comes on the back of recent exploration successes such as the 250m barrel Glengorm licence, the largest discovery in UK waters in a decade, in which Total has a 25 per cent stake. Little wonder, then, that Ms Michie cites the independent report from the Committee on Climate Change, which concludes that “oil and gas will remain an important part of the UK’s energy mix for decades to come”.
It’s said that confidence is an elusive quality, but there are certainly signs that it is returning to a corner of the energy market that has been in the doldrums since the 2014 oil price slump. The latest industry survey commissioned by the Aberdeen & Grampian Chamber of Commerce reveals that almost half of contractors in the UK continental shelf (UKCS) are operating at or above optimum levels, the highest figure recorded in the survey since 2014. A clear majority of companies are also forecasting an increase in profits in 2019.
Decommissioning and diversification
It isn’t business as usual, though. Many oil service providers have recognised that they will need to adapt to exploit new commercial opportunities that are arising, not only due to the decommissioning of assets in mature fields, but also because of the expansion of offshore wind farms. Decommissioning now represents just under 10 per cent of overall expenditure in the UK oil and gas industry, but the same survey indicates that 52 per cent of oil and gas businesses have recorded increasing demand for their products and services in non-oil and gas projects.
Figures from Rystad Energy show that oilfield service providers are rapidly diversifying beyond oil and gas development into renewable energy projects. Prior to the 2014 slump, non-upstream oil and gas activities accounted for 22 per cent of the revenues of the service companies. It has subsequently grown to 27 per cent and the Norwegian energy research group expects the trend to accelerate over the next decade.
Baker Hughes (US:BKR) provides an example of how oil services companies are evolving, a process aided by its tie-up with GE's (US:GE) former oil and gas business. The group has cut its exposure to the upstream sector from 75 per cent of revenue in 2014 to 60 per cent last year. That proportion is expected to narrow further as Baker Hughes makes inroads into industrial/chemical sectors, with new products in geothermal exploration and generation, waste heat recovery systems for gas turbines and specialist drone technologies for solar, wind and nuclear power plant applications. Other sector heavyweights such as Saipem SpA (SPM.MI) have been allocating significant levels of capex to exploit the global energy transition, while John Wood (WG.) was recently appointed by Dudgeon Offshore Wind Limited to provide independent technical advice to lenders on the £1.4bn refinancing of its Dudgeon Offshore Wind Farm. Although it may seem clear which way the wind is blowing, an increase in demand for alternative energy generation doesn’t necessarily translate into a commensurate decrease in oil and gas volumes.
