Edinburgh firm flags impact of crude price rise on North Sea

North Sea oil and gas firms are set to make more money than they have done for years in 2022 helped by the surge in commodity prices and ‘savage’ cost cutting, experts have predicted.

However, investment in the area is likely to remain at near 20-year lows amid uncertainty about what the official drive to cut carbon emissions will mean for the sector.

Wood Mackenzie said companies are likely to book near-record profits next year when cash flow generation could hit levels last seen in the early years of the century.

Neivan Boroujerdi, principal analyst, North Sea upstream at the Edinburgh-based consultancy said: “The savage cost cuts carried out during previous downturns will combine with strong prices to generate cash flow generation levels last seen before the 2008 financial crash.”

The comments highlight the dramatic improvement in their trading fortunes that firms operating in the North Sea have enjoyed amid the recovery of the global economy from the impact of the pandemic. This has been fuelled by the rollout of coronavirus vaccines from late last year.

The outlook for the industry appeared bleak after the start of the pandemic sent oil and gas prices plunging as demand dried up.

The downturn triggered a fresh wave of cost cutting in the North Sea. Many firms had slashed operating costs and spending on new developments in response to the long slump that started in 2014.

Mr Boroujerdi suggested that the increase in profitability in the North Sea could prompt the Westminster Government to impose a windfall tax on the sector. He observed: “Fiscal changes could become a hot topic. There is high tension between the government’s aspirations to be a net zero leader while still encouraging investment in upstream oil and gas.”

Exploration and production (E&P) firms may be less keen to invest in North Sea projects after Shell dropped plans to develop the Cambo find off Shetland following protests by environmentalists.

Mr Boroujerdi said: “ While investment is set to stay near 20-year lows – and there are question marks over government and E&P appetite for new developments – there could be some smaller project sanctions.”

However, North Sea production should increase next year following the completion of developments that are already under way, such as the giant Tolmount gas field.

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