Shouting to be heard over an Arctic blast, Alistair Hope points out a dozen oil platforms, some nearby, their gas flares illuminating a heavy North Sea sky, others misty specks on the horizon.
He reels off their names: Thistle, Dunlin, Mortician, Alwyn, Cormorant, Dunbar. Each is a steel giant, the height of the Eiffel Tower and consuming enough power to light a small city, anchored by concrete legs to the seabed nearly 200 metres below. Beyond the size and scale, the appropriately named Hope also sees an opportunity.
From his vantage point on Royal Dutch Shell’s Brent Delta, one of several platforms to be scrapped, the man dismantling one of Britain’s biggest oilfields is looking past the collapse in oil prices to a multibillion-euro decommissioning boom.
Hundreds of miles away in a Mayfair café in London, the chief executive of a small UK explorer, a veteran of past oil market highs and lows, is less bullish. "The industry is in a state of crisis," says Tony Craven Walker, chief executive of Serica Energy. "Smaller companies like ours are losing their ability to raise finance and reward shareholders. It is a slow death by attrition."
Decommissioning
He fears the end of the North Sea basin could come much earlier than previously expected. The plunge in prices, a tax system that he says deters investment and a failure by producers to co-operate could lead to a wave of early field closures and accelerated moves to decommissioning.
Chris Wheaton, analyst and fund manager at Allianz Global Investors, says the region – between the UK and Norway – "is balanced on a knife edge".
The repercussions of oil’s slide from more than $115 a barrel last summer to around $60 now are rippling across the globe.
For consumers, especially motorists, cheaper crude is a boon. Lower inflation could stave off interest rate rises in developed economies. But countries dependent on oil revenues to finance spending are hurting. So, too, are the US’s shale producers, who pumped the new supply that contributed to the market’s collapse.
Ageing North Sea fields, already seen as a marginal bet from which the biggest oil companies have been retreating, look very vulnerable.
Oil & Gas UK, which represents offshore operators, says a fifth of production, or a third of fields, is now unprofitable. Cash losses, or the deficit after subtracting costs from revenues, topped £5 billion (€6.87 billion) last year, the biggest shortfall since the 1970s.
This loss follows a long-term decline in production. Output on the UK continental shelf, despite record investment, has been sliding since 2000. It dropped another 1 per cent last year to 1.42 million barrels of oil equivalent a day, versus a peak of 4.5 million 15 years ago. Exploration has all but ceased.
The causes predate the price plunge, which gathered pace after Opec opted not to cut output in November.
Finding oil has become harder. There are plenty of barrels to be recovered – some 10 billion known reserves lie beneath the sea on the UK continental shelf and as many as 24 billion may be available for extraction, says Oil & Gas UK. But they are being found in smaller batches, which make them less attractive to companies such as BP, Shell, France's Total and the US's ConocoPhillips, which have big exploration budgets and need large finds to justify new spending.
The situation is more complicated for smaller companies such as Serica. In its case developing a single field would make sense, but it still needs access to the platforms and pipelines run by bigger companies. Maintenance of infrastructure requires constant spending and disagreement over access fees is common, meaning that even if you find oil, it can be hard to get it to market.
London-listed oil and gas minnows, interested in backing projects in the North Sea, are becoming financially distressed, says corporate health monitor Company Watch.
Ewan Mitchell, its head of analytics, estimates that 70 per cent of the 126 oil exploration and production groups that are quoted on the London Stock Exchange – many exposed to the North Sea – are lossmaking and have accumulated total losses of £1.8 billion (€2.5 billion).
“We expect a wave of mergers, highly discounted share placings and, sadly, more than a sprinkle of company failures if commodity prices don’t soon recover,” he says.
Cost inflation
Companies have done themselves few favours, allowing cost inflation to soar while oil was at $100 a barrel. Semi- submersible rig rates hit a multiyear peak of about $400,000 a day last year before sliding 25 per cent, while the average salary for oil workers is almost six figures.
The plunge in crude is the catalyst that could lead to “disaster” without a drastic simplification of the tax system, says Craven Walker.
The annual results season has been peppered with announcements of cuts to capital spending and urgent action to reduce running costs. Wood Mackenzie expects investment in the UK portion of the North Sea to fall from $19.2 billion in 2014 to $10.8 billion next year.
"It takes a brave company to go against the trend and more cuts will happen as time goes on and the oil price stays low," says Malcolm Dickson, principal analyst. – (Copyright The Financial Times Limited 2015)
