NORTH Sea oil and gas companies will generate a £10 billion cash surplus this year putting the Treasury in line for £2bn tax receipts but many services firms are still struggling amid a continued slump in drilling activity.
A report by trade body Oil & Gas UK published today finds the crude price rally since late 2016 combined with efforts to increase efficiency has helped spark a dramatic improvement in the finances of the North Sea industry.
Read more: West of Shetland in focus for BP after oil giant quadruples profits
The £10bn free cash flow projected for this year would be the highest figure achieved since 2010 when the industry was enjoying a boom. This was followed by a deep downturn after the oil price tanked in 2014.
The North Sea industry cost the Exchequer £300m in 2016-17 as the bill for tax breaks exceeded the total revenue collected.
Oil & Gas UK noted companies are also set to increase total annual output in the North Sea after starting production from projects in areas such as West of Shetland that were approved during the boom.
However, claiming the industry is at a crossroads, Oil & Gas UK warned production is set to fall again after 2020 unless firms ramp up drilling activity.
“A 50 per cent decline in drilling activity over the last five years means real concern about the ability of industry to realise its potential,” said Oil & Gas UK chief executive Deirdre Michie.
The increase in the crude price has encouraged firms to approve North Sea field developments again after slashing spending amid the downturn. However, the six projects approved this year are not big enough to replace the output that will be lost as oil fields mature.
Read more: Giants provide $600m boost for North Sea oil and gas sector
If the potential of the North Sea is to be realised there needs to be a big increase in exploration work and in the development of finds that have been left idle.
But exploration is expected to remain at record lows this year in spite of signs of interest in areas such as West of Shetland.
Firms are focusing spending on lower risk activities. Oil and Gas UK said cost control and capital discipline remain high on the agendas of firms that operate fields.
It warned the supply chain may not be able to support increased exploration and development activity if firms in areas such as drilling support have to wait too long.
Read more: Conditions remain tough in oil and gas services sector
“Revenue and activity reductions in recent years have stretched cash flow and margins resulting in loss of capacity,” said Ms Michie. “Coming from such a baseline there has to be concern around the ability of the supply chain to sustainably service an increase in demand.”
Oil & Gas UK said employment trends appeared to have stabilised recently after firms cut thousands of jobs amid the downturn.
The industry supports over 280,000 jobs in the UK, down from 450,000 in 2014. The number of people employed in the industry is expected to fall in the period to 2035, reflecting the increasing maturity of the basin and continued efforts to increase efficiency.
Read more: One in three North Sea oil jobs 'lost' since 2015
The report said 10 billion barrels could be recovered from the North Sea by 2035 if the right moves are made, against 7bn on baseline forecasts.
Firms must work with each other and with the Government to help meet the challenge.
“Recent fiscal and regulatory changes have helped to position the United Kingdom Continental Shelf as one of the leading destinations for investment,” said Ms Michie. “Ensuring a stable and predictable fiscal regime will be key ... especially with Brexit approaching.”
Oil & Gas UK estimates a ‘hard’ Brexit involving the country adopting World Trade Organisation terms could add £500m a year to the industry’s costs. The best case scenario, with minimal EU tariffs, could generate £100m savings annually.
It said the only element of expenditure which had increased throughout the downturn was decommissioning spend. This is expected to average £1.5bn to £2bn a year to 2023.
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