THE North Sea is set for another grim year in which investment in fields will fall and more firms will fail amid the fallout from the crude price plunge experts have warned.
As 2015 drew to a close experts at the big four accounting giants said the near 70 per cent fall in the crude price since June last year has cast a shadow over the North Sea leaving some companies facing an increasingly tough struggle to survive.
“We know some businesses are finding life very, very difficult,” said Derek Henderson senior partner in Deloitte's Aberdeen office.
Mr Henderson said the biggest challenges will be faced by smaller firms that may have just one or two exploration assets acquired during the boom in North Sea activity that ended when the crude price started tumbling last year.
Many have relatively big debts which they may struggle to service.
“There’s too many small players,” said Richard Spilsbury a partner at PwC who specialises in oil and gas. “Some will have to merge, get taken out or close down.”
The fate of North Sea-focused Iona Energy has concentrated minds. Iona said last month it was likely its UK subsidiaries would commence insolvency procedures after a global energy company pulled out of talks to buy into an exploration prospect. Directors said this left the company unable to complete a proposed debt restructuring.
Mr Henderson said the high cost North Sea would find it increasingly hard to attract investment funding from those firms that have other things to spend money on.
He said: “A number of players will be looking at the requirement to make further investment and the case for the North Sea might not be as strong as some places. I’m not sure the North Sea will come out as well as some places. There will be a desire to rationalise portfolios.”
In September the Wood Mackenzie oil and gas consultancy warned around 140 UK North Sea fields will be taken out of production because they are not profitable enough over the next five years, even if oil prices return to $85/bbl.
A range of firms including Shell have made it clear they want to cut their exposure to the North Sea and put assets up for sale.
“The North Sea is up for sale. Everything is up for sale frankly,” said Mr Spilsbury.
Potential buyers are scanning the North Sea but some may be scared off amid uncertainty about what could happen to crude prices.
Saudi Arabia appears happy to let prices remain low, in the hope of forcing US shale producers out of the market. Brent crude could lose more ground if significant volumes of Iranian production come onstream next year, following the easing of sanctions on the country.
Mr Spilsbury reckons Brent crude could trade at $55 per barrel or less for some years, compared with $115 in June.
Some North Sea veterans have said the downturn has created opportunities to buy attractive assets at good prices.
Tom Cross of the Parkmead Group, Faroe Petroleum’s Graham Stewart and Serica Energy’s Tony Craven Walker all expressed interest in buying North Sea assets in the second half of the year.
However, Mr Spilsbury noted there remains a big gap between the price expectations of sellers and buyers.
Dane Houlahan, corporate finance partner at KPMG in Aberdeen, said some deals were foundering because of uncertainty about the potential cost of decommissioning assets in future.
Financiers are working on new structures that they hope will help get around the problem.
The likes of Mr Cross, who built Dana Petroleum into a £1.9bn North Sea-focused business, have noted the fall in the price of services such as drilling amid the downturn has made it possible to do more for less. This could encourage firms to invest in the North Sea.
However, the fall reflects the pressure that services firms face as companies that own oil and gas fields cut activity and try to squeeze concessions out of suppliers.
“There’s no doubt some stress around in the supply chain,” said Mr Houlahan.
This could result in a surge in mergers and acquisitions activity in the services sector as firms look to add scale and focus on their most profitable operations.
Barry Fraser a director at EY said: “The supply chain needs to change urgently to reduce cost and improve efficiency. This will lead to an increase in M&A activity.”
He said history suggests the consolidation process will be initiated by major players. The effects will “ripple right through the highly fragmented sector”.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here