Offshore staff
LONDON – North Sea oil and gas industry is entering uncharted waters, according to Wood Mackenzie, with the COVID-19 virus, the collapse in the oil price and production restraint pushing Brent to its lowest point since 2003.
Neivan Boroujerdi, principal analyst at the consultant’s North Sea upstream team, said: “In the short-term, the North Sea can survive. Cost reductions achieved during the last downturn mean 95% of onstream production is ‘in the money’ at $30/bbl.
“But close to a quarter of fields will run at a loss in this price environment. The major concern here is not volumes. Early shut-ins would accelerate $20 billion in decommissioning spend.”
In the short term, operators may seek to rein in costs by cutting back on planned opex; but over the longer term, Boroujerdi said, continued investment will be needed both to increase production and to reduce unit costs.
Should the industry decide to go “into harvest mode,” he added, a premature end appears inevitable.
“Most FIDs [final investment decisions] for 2020 are off the table. At current prices, nearly two-thirds of development spend could be wiped from our forecast over the next five years.
In the UK North Sea, he said, annual investment could fall below $1 billion by 2024. “The threat of stranded assets is real – we estimate nearly 6 Bbbl of economically viable resources could be left in the ground, not to mention a further 11 Bbbl of contingent resources.”
Short-cycle, strategic tiebacks are still likely to go ahead, he claimed. “About 3 billion of the 6 Bbbl of economically viable resources break even below $50/bbl (NPV15); further cost reductions or a price recovery could quickly make them viable again.”
However, big cost reductions from the service sector appear to be unlikely. While demand for services will fall, the supply chain may decide (or feel compelled) to reduce its footprint.
So, there is no guarantee that costs will be lower in the future. This means E&P companies will have to re-consider their development plans to achieve material reductions.
But there are other potential pitfalls ahead, as the majors active in the North Sea could decide to reallocate their will capital elsewhere, while the sector's independents will struggle financially, especially if banks look to decarbonize their portfolios, Boroujerdi claimed.
“Could private equity come to the rescue again? With several unmonetized vehicles already on the shelf, a new wave of money is not certain.
“What was already looking like a difficult exit story just got a whole lot harder.”
Offshore Norway, while more than 60% of investments come from locally-focused players with strong balance sheets, the country still needs a Brent price of $40/bbl to avoid negative cashflow for the first time in over a decade.
“At a time when there is public pressure to move towards more a ‘greener’ energy mix, it’s hard to see governments easing the fiscal terms.
“Long term, the energy transition needs to accelerate but there’s a risk of short-term stagnation. For the companies that survive, they will need to adapt to a greener future.”
03/23/2020
