UK offshore sector calls for government financial support

March 19, 2020
Britain’s offshore sector faces a precarious future, according to Oil & Gas UK, with gas prices halving to 20p/therm in addition to the oil price collapse and the spread of the coronavirus.

Offshore staff

LONDON – Britain’s offshore sector faces a precarious future, according to Oil & Gas UK (OGUK), with gas prices halving to 20p/therm in addition to the oil price collapse and the spread of the coronavirus.

Severe pressures are already building across the sector’s supply chain, undermining businesses and jobs, the association warned in the first of a planned series of Business Outlook reports.

OGUK’s Business Outlook: Markets and Investment report foresees UK offshore drilling levels sliding back to the lows last experienced in 2016, more than one-third down on previous predictions.

And capital investment could drop by 20-30%, with some operators in the sector potentially suffering negative cash flow this year.

Although the UK North Sea industry was slowly emerging from one of the most prolonged downturns in its history, the supply chain had remained under significant pressure, having to contend with tight margins and low offshore activity levels.

The association has therefore called on Britain’s government support to ensure the sector continues to provide security of energy supply. OGUK is also working with industry and regulators to determine how best to protect supply chain companies and jobs.

Association chief executive Deirdre Michie said the report “shows that this sector is now in a paper-thin position…

“Action is needed now to ensure the sector doesn’t lose the skills, experience, and infrastructure it needs to meet the UK’s energy needs of today as well as help deliver its net zero ambitions in future…

“OGUK is requesting urgent meetings with ministers to consider a COVID-19 Sectoral Resilience Package which would help to give some reassurance to the regions, businesses, and jobs this industry supports.

Ross Dornan, OGUK market intelligence manager, said of the report: “The first week of March saw the most dramatic fall in oil price in almost 30 years and it remains uncertain as to how the market is going to evolve in the coming months as the coronavirus impact increases each day.

“Alongside this, the gas price has more than halved in the last 12 months, and we face a situation where E&P production revenues are set to be almost 50% lower than they were two years ago despite the same level of output.

“The UKCS has seen significant improvement in its competitiveness, efficiency, and productivity in recent years. These improvements will help performance, however, in this harsh environment we expect companies to take significant steps to preserve cash flow and ensure business continuity.”

This will seriously impact the supply chain, he said, “which has not yet seen much recovery from the previous downturn and doesn’t have the capacity to absorb much more pain.

“Companies are increasingly diversifying into other energy sectors and across industries more generally, but many cannot diversify or are too early in their journey to provide adequate protection/buffer.

“At this time innovative thinking, partnerships and meaningful collaboration will be required to help as many as possible to weather the storm.”

Speaking in a briefing to journalists yesterday, Dornan said it would clearly take time for markets to address the current oversupply of crude, and that would depend on how long OPEC, Saudi Arabia and Russia can tolerate low oil prices.

More than half the UK’s gas and over three-quarters of its oil comes from production in UK waters, he said. However, if further investment is now withheld, this could impact the sector’s ability to maximize production over the next few years.

In recent years, debt financing has been a lifeline in numerous instances, but if current conditions persist, many companies in the supply chain will not survive, Dornan added, leading to more insolvencies and consolidation.

“We are a significant provider of secure energy and support hundreds of thousands of jobs in the UK. So, we need government and others to support us through providing resilience packages to sustain companies through this period.”

Earlier in the week the UK Chancellor promised to set aside funds for distressed companies, but it was not clear at this stage what this means for the oil and gas sector, or how the money could be accessed.

“It is critical for our companies to sustain cashflow so that they can maintain their capabilities and keep hold of their workforce where possible.”

OGUK has been hearing examples of companies looking to downsize certain activities, but it was too early to predict the full impact, he cautioned.

“Market conditions are unprecedented, with supply and demand both severely down. In the longer term we are looking to the government to agree to provide a sector deal, unlocking the potential for our industry to ensure the UK’s energy transition to net zero, as well as security of supply…

“I think across the board companies will look to reduce their operational risks, and annual turnarounds may come into that category. It’s a very fluid, dynamic environment and more will be known in the coming weeks. But we need to ensure activities continue right across the basin.”