North Sea on a knife edge?
In the midst of the current economic climate, the question routinely arises: Is the end of the drive for exploration in the North Sea still beyond the horizon, or now very much on it?
Will this economic downturn spell the end for the very activity that the UK Government and industry have invested so much time and effort in encouraging over recent years, through initiatives ranging from the partnership project PILOT to promote licenses?
Certainly global recession, constrained liquidity, a fall in the oil price from last year’s high of $147/bbl, and an increased cost base combine to transform the operating environment. It is a scenario that challenges the long-term viability of the industry’s small- to mid-cap players. We operate in a tough industry and it’s one that is getting tougher all the time as operators look to make efficiencies and add value at every turn. Pressure can be applied, for example, to secure the renegotiation of long-term agreements with contractors and suppliers to cut expenditures. From service companies to operators, we all have been caught up in the rising cost of human resource and third-party services in recent years, and now everyone is feeling the pain.
Reality checks are not hard to find. There is dark talk of up to 50,000 North Sea jobs potentially being lost as a result of the downturn. Earlier this year, the industry representative body Oil & Gas UK warned that exploration was at risk of dropping sharply in 2009, and proposed that the tax relief due on exploration drilling should be refunded at the time the well is drilled rather than wait until the producing development is in place. This would free new funds for further exploration, result in higher production and tax revenues for the Treasury, and could be implemented at no cost.
Statistics released by the UK’s Department of Energy and Climate Change (DECC) in June confirm the extent of the difficulties the industry faces. They showed that oil exploration – the "lifeblood" of the industry – fell by more than 75% in the first quarter of 2009.
In the first three months of last year, 13 exploration wells were being drilled by offshore companies. However, this year the number slumped to just three, representing a fall of 76.9% on the same period last year, as the oil price has dipped as low as $35/bbl.
Oil & Gas UK and the new Commons Energy and Climate Change Committee are calling for more effective tax breaks, action over the credit crunch, and moves to ensure new developers can access existing platforms and pipelines to get hydrocarbons onshore from fields too small to justify building their own facilities.
However it is achieved, the momentum for exploration in the North Sea must be maintained if we are to recover the remaining reserves critical to meet the UK’s demand for energy. Critically, we need to use the existing infrastructure to achieve this. If exploration stops now, we will see operators, service companies, and mobile infrastructure such as drilling rigs start to move out to other regions around the world where the reservoirs are larger and less complex. It will be difficult to turn things around and bring life back to the North Sea. The existing fixed infrastructure will have deteriorated and the skills pool with be significantly depleted as people are forced to move on. The impetus will be lost and it will be incredibly tough, if not impossible, to pick it up again.
It all paints a picture of a potentially bleak future, but it is not inevitable. The challenge is to assess and deliver ways to stop this from happening. And aside from the political and fiscal forces at work in this scenario, the answer certainly lies in companies becoming increasingly creative in the way they do business, and looking for innovative technical and commercial solutions that generate and add value.
They are principles that have evolved along the North Sea supply chain in recent years but they are not options any more. They are commercial imperatives. Some of the traditional ways of doing business are becoming obsolete. We need to work smarter, more efficiently, and more creatively to support ongoing exploration and production.
Since Senergy was formed in 2005, these have been reference points for all our work and now, more than ever, we believe that working to apply commercial and technical innovation to minimize risk and add value for clients is essential to secure our industry’s long-term success.
Applying strict cost discipline and optimizing project development cost per barrel are fundamentally important. Those alone, however, are not enough to transform project and operational performance.
To illustrate the point with one example: Increasing the alignment of an integrated services provider and an operator, and ensuring both parties proportionately share in the risks and reward, means success for both businesses is dependent upon successful project delivery and value creation.
If the services provider enables the client to access a resource base capable of delivering a fully integrated project solution, and generates greater project efficiency, optimum development cost, and improved overall performance, it should have the confidence and willingness to share in the capital risk.
It is something we certainly are prepared to do. I have yet to find a client who wants to pay us twice for the same job, but if we are willing to share the risk on a project, the client is willing to share the rewards when we make a project a success.
It is companies like Senergy, with drive, innovation, and creativity who will succeed in the current economic downturn – and, more importantly, in the "new" energy industry that will exist beyond it.
James McCallum
CEO, Senergy
This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at[email protected].