OGV Energy’s May North Sea energy update

Over the past month, the key theme in the UK North Sea industry was the coronavirus pandemic, its direct impact on UK offshore oil and gas operations, and the impact of the oil price crash on the future of the North Sea oil and gas sector. 

Following the price collapse in early March – driven by the flop in global oil demand and the break-up of the OPEC+ production cut deal – companies operating in the UK North Sea rushed to cut budgets, investments, and operational costs. Industry associations started to warn about the difficult times ahead for the UK offshore industry and its supply chain.

“The combination of the global economic impact of the continued spread of the coronavirus, the most dramatic fall in oil price in almost 30 years and a halving of gas prices is driving an increasingly fragile outlook for the UK’s offshore oil and gas sector. Severe pressures are already building across the sector’s supply chain, with the pressures expected to significantly undermine the industry’s businesses, jobs and contribution to the economy,’’ industry association OGUK said in March.

OGUK published its ‘Business Outlook 2020: Markets & Investment’ report, which says that the current low prices of oil and gas will impact the revenues of all companies operating in the UK Continental Shelf (UKCS). As many of those E&P firms will be looking to preserve cash at oil in the $30s, the supply chain companies will feel the downturn almost immediately because of the lower offshore activity.

“This comes at a time when many areas of the supply chain are already facing fundamental financial challenges, in light of significantly reduced revenue and margins in recent years. There is limited scope for many companies to absorb further cost reductions,” OGUK’s report said.

Capital investment in the UKCS is likely to drop by 20-30% this year compared to the £5.5 billion investment in 2019. The number of wells drilled in 2020 could drop by more than one-third compared to previous expectations of around 140 wells, when forecasts had factored in oil prices at $60-65.

The supply chain will suffer as E&P firms defer projects and slash investment and activity, OGUK said.

The current situation “is likely to result in a higher number of consolidations and insolvencies in the market,” noting that access to finance across the industry in the coming months will be crucial.

“It is important that the government works closely with our industry, as with others, to help weather the current pressures to ensure that they do not result in permanent damage to the UK’s capabilities,” OGUK said in its report.

According to a Rystad Energy impact analysis, some 20% of Europe’s mid- and small-sized oilfield service companies, or more than 200 firms, the vast majority in the UK and Norway, are set to become insolvent as purchases on the oilfield services market are set to drop by US$5 billion this year compared to 2019.

Most of the lost purchases, or US$4.5 billion, are expected to hit Norway and Britain, mainly within the segments of MMO, drilling rigs, and well services, according to Rystad.

The largest offshore trade union Unite welcomed a new agreement covering offshore workers. Unite has worked with the Offshore Contractors Association (OCA) and other trade unions to agree a Supplementary Project Agreement (SPA) to the Offshore Contractors Partnership Agreement (OCPA).

The SPA agreement will ensure Unite members at risk of redundancy or lay off, and those recently made redundant can benefit from the UK government coronavirus job retention scheme, the union said at the end of March.
    
Offshore union RMT called for urgent action to protect Britain’s energy supply chain from collapse.

“The UK Government must agree a new offshore oil and gas industrial strategy with the offshore unions and industry in order to prevent catastrophic job losses and skills shortages especially in Scotland from the combined impact of collapsing oil prices and COVID-19,” RMT General Secretary Mick Cash said.

OGUK welcomed the UK Government’s action to help workers and companies who are hit by the triple impact of COVID-19, the oil price crash, and the lowest gas prices in the last ten years.

“In that context the strong response from the UK Government and their clear determination to support both workers and companies is very welcome. It is now crucial to ensure companies can easily and rapidly access this money as for many businesses and individuals cash flow is now vital,” said Deirdre Michie, Chief Executive of OGUK.

Industry body Subsea UK said in April that the underwater engineering industry is exploring ways in which it can transfer its expertise to help support the national effort to tackle the coronavirus pandemic.

According to Subsea UK, engineering companies have the relevant products and manufacturing expertise, particularly in breathing apparatus and life support equipment, valves, and control systems, to answer the call for help from the UK and Scottish Governments.

Apart from responding to the calls for help, Subsea UK is also “working closely with organisations, such as OGUK and the OGA, to inform Government of the specific economic challenges facing the sector and to seek clarity for subsea businesses on the measures in place to support them and on the guidance for them in continuing with critical operations,” said Neil Gordon, Subsea UK chief executive.

The North Sea faces mass project deferrals, as many upstream projects are being reassessed at $30 oil, Wood Mackenzie said in early April.

The North Sea can survive at $30 oil in the short term, as 95% of onstream production is still ‘in the money’ at US$30 a barrel oil, according to Neivan Boroujerdi, Principal Analyst, North Sea Upstream, at WoodMac.

“But longer-term, investment is required. If the industry goes into harvest mode, a premature end is inevitable,” Boroujerdi noted.

According to an analysis from Westwood Energy Group, if oil prices stay below $27 per barrel through the end of 2020, production in the UKCS will not be generating enough revenue to cover both operating costs and the planned capital expenditure this year. Operators have already deferred the final investment decisions (FIDs) for several projects in the UK North Sea, Westwood analysts said.

Companies operating in the UK North Sea have already announced CapEx cuts and project deferrals. Supermajors BP and Shell slashed capital spending plans for this year, targeting to preserve cash and protect their balance sheets and dividends.

Other operators also announced project-specific deferrals and/or CapEx reductions to cope with the oil price collapse. 

EnQuest said in March that its updated working assumption is not to re-start production at the Heather and Thistle/Deveron fields.

In the 2019 results announcement in April, EnQuest’s chief executive Amjad Bseisu said:

“Given the prevailing low oil price environment, we have taken decisive action to lower our cost base, targeting $190 million of operating cost savings in 2020, equating to unit operating expenses of c.$15/Boe. With these significant cost reductions, cash flow breakeven is estimated at c.$33/Boe in 2020.”

INEOS FPS informed its customers that it would delay the scheduled maintenance of the Forties Pipeline System, originally planned for June 2020, to the spring of 2021.

“The decision has been taken in the face of the ongoing Government restrictions due to the Coronavirus pandemic and in the interests of providing clarity to its customers and the UK Oil and Gas Industry,” the company said in early April.

Due to the delay, Rystad Energy raised its North Sea oil production forecast by 330,000 bpd to 2.96 million bpd for June 2020 and by 190,000 bpd to 3.04 million bpd for July 2020, expecting several hundred thousands of extra barrels to add to the already oversupplied market every day.

Due to the oil price crash, Cairn Energy announced significant reductions and deferrals in the 2020 programme, representing an overall 23% reduction in capital expenditure this year. Planned 2020 CapEx on the UK producing assets is expected to be below US$45 million, reduced from the original forecast of US$65 million as a result of cost savings identified and the deferral of certain activities planned for the Catcher fields, Cairn said.

Siccar Point Energy E&P and its joint venture partner, Shell UK, announced the deferral of the planned sanction date for the Cambo project to 2021 in light of the unprecedented worldwide macroeconomic dislocation resulting from Covid-19. Siccar Point and Shell UK had been planning to bring the project to an FID in the third quarter of 2020. 

Petrofac’s response to the market conditions include reducing overhead and project support costs by at least US$100 million in 2020 and by up to US$200 million in 2021, in addition to reducing CapEx by 40% and suspending the 2019 final dividend.

Ithaca Energy cut its 2020 capital expenditure by 50% to around $120 million, including by deferring the Fotla exploration well, reducing activities on the Jacky decommissioning programme and the Hurricane development.

“With the abrupt emergence over recent weeks of a more challenging macroeconomic environment, it is clear that we need to accelerate our on-going efforts to further reduce the breakeven cost of our assets and our near-term investment programmes,” CEO Les Thomas said. 

In brighter news, Neptune Energy said in the middle of March that an encouraging hydrocarbon discovery had been made at the Isabella exploration well in the UK Central North Sea. At the end March, the company confirmed that at the Seagull project, construction of the topside is expected to begin this year and production remains on schedule for start-up in the second half of 2021. At Cygnus, preparation work for a tenth infill well on the field is ongoing ahead of possible drilling in 2021. 

Unity, the provider of well integrity technology, services and engineering solutions, said in March it was awarded a three-year multi-million-pound contract by Spirit Energy to maintain wellhead equipment across twelve platforms in the East Irish Sea, Southern North Sea, and the Dutch sector of the North Sea.

Spirit Energy announced that it had boosted production from two North Sea fields following successful drilling campaigns. First gas from the new C6 well at Spirit Energy’s Chiswick field was achieved in March, and first oil from a new production well at the Chestnut field was also achieved in March.

Read the latest issue of the OGV Energy magazine HERE.

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