The industry, most of whose operators and constractors are represented by Oil & Gas UK, published its relatively bullish Business Outlook 2018 this month. Operating costs have halved in the last few years and are now being sustained at around $15/barrel of oil equivalent (boe); this year’s production is on track to be a fifth higher than it was in 2014; and more major new projects have been sanctioned by upstream companies so far this year than in the last two years combined. 

The total discovered volumes have increased in the last two years, with more than 700mn boe added across 2016-17. Although this was due to a small number of large discoveries west of Shetland, this figure represents almost the same amount as the period 2008-15 combined. 

There have also been successes recorded by the wells spudded so far in 2018, with Apache announcing a 10mn boe discovery at the Garten field in the Beryl area, as well as early indications that the Cambo appraisal well drilled by Siccar Point Energy has been positive. Total E&P UK is also continuing to review the results of its Glendronnach well in the west of Shetland area. Cairn Energy spudded the Ekland exploration well in July and Zennor Petroleum has begun further appraisal activity on the Finlaggan prospect, with the intention of moving towards development of the field. Azinor Catalyst has also spudded the Plantain exploration well and will look to follow this with a contingent sidetrack to appraise the Agar discovery. 

There is expected to be a pick-up in exploration drilling activity in the second half of the year, with a number of plans and contracts already in place including Siccar Point’s “eagerly anticipated” Lyon well in the west of Shetland region and Neptune Energy’s near-field exploration well in the area around its Cygnus field. Nexen is also planning further exploration and appraisal work on its Glengorm and Cragganmore prospects, the report says. 

On the negative side, the total exploration activity this year is expected to be the lowest since 1965 and reserves replacement has continued to decline. Between 2000 and 2008, about 3bn barrels of oil equivalent (boe) were discovered and around 12bn boe produced. But in the next eight years, only around 1.2bn boe were discovered and 6bn boe produced. Further intervention is required to extend the productive life of the basin, it says. Enough 2P reserves have been added to maintain the reserves-to-production ratio at an average of around nine years but the lack of new projects sanctioned in recent years puts significant pressure on the reserves base. 

The supply chain has also been badly squeezed, and this could lead to capacity constraints by 2021 as a result of contraction in recent years and an expected increase in new development activity at home and abroad, says OGUK. The constraints are expected to be felt most across drilling and wells services and within engineering and subsea sectors. 

OGUK CEO Deirdre Michie told industry at the launch that the industry is emerging from one of the most testing downturns in its history. However, the steps that have been taken by industry, government and the regulator have delivered tangible results.  

“Despite the improvements seen in recent years, we find ourselves at a crossroads. Record low drilling activity, coupled with the supply chain squeeze, threaten industry’s ability to effectively service an increase in activity and maximise economic recovery. The UK Continental Shelf is a more attractive investment proposition – our challenge now is to take advantage of this. We have to drive an increase in activity while continuing to find and implement even more efficient ways of working which support the health of supply chain companies whilst also keeping costs under control,” she said.  

Higher oil prices yet to filter down 

Rising oil prices have restored some missing confidence needed to take final investment decisions offshore, and so the services industry is wondering when some of this income will filter down to them. The wholesale gas price was up 60% in the first half of the year, compared with the same period last year. 

At a breakfast briefing hosted by law firm White & Case, OGUK said that free cash flow this year could total £10bn ($13bn), the highest since 2010. Production, at 1.7mn barrels of oil equivalent/day, is expected to rise further as more projects come on stream this year, extending the four-year run of yearly gains that ended a 15-year steady decline in output. 

Thanks to technological advances and rigorous cost cutting and collaboration with the services industry, companies are now more profitable than they were when oil was $120/barrel, said OGUK economist Mike Tholen. And many service companies have adapted by diversifying into working with producers of other forms of energy such as renewables; or finding markets overseas. They are adopting to the low-carbon future too, he said, but many are in a very difficult position. 

And operators remain only cautiously optimistic, only committing to projects with a breakeven of $40-$50/barrel, or about two thirds of the oil price, OGUK said: their focus is still on capital and cost discipline. They are paying down debt, returning cash to shareholders and recovering after completing takeovers. As a result of this “restrained optimism,” service companies are wondering when their fortunes will also start to improve. "A competitive basin needs a supply chain," OGUK said, describing the sector as "squeezed." 

There have been offshore strikes at several production sites this year including the Total-operated Alwyn sector. This could indicate that contractors feel it is time to ease up on the cost-cutting and even share the benefits. Some companies have been bidding for contracts at a loss in order to keep their assets in circulation. 

Shell UK’s view of E&P 

Speaking for the majors, the chair of Shell UK Sinead Lynch did not promise any immediate bonanza and acknowledged that the Offshore Contractors Association had issues. Having an engaged workforce was important, she told the briefing. The Anglo-Dutch major is now conducting a 'holistic' review of its offshore operations and will announce its findings in the coming months, she said. 

There will be money flowing back into the upstream, as the company has taken several final investment decisions (FIDs) this year – including Penguins and Fram – that were not in the 2017 business plan; and operator BP has also taken FID on Alligin, which it owns equally with Shell; but the FIDs had been enabled by reworking terms with the supply chain and partners and the fiscal framework. She said that of the several other FIDs that Shell is considering, at least one more would be taken this year, but did not tell NGW which. 

She said, in response to a question from the floor, that Shell would still be operating offshore UK in 18 years’ time, although the shift towards electricity generation was not in question and hydrogen and biofuels would grow. “I am not sure how much exploring offshore we will be doing, but there will be robust production and free cashflow,” she said.  

Preparing for the EU exit 

OGUK has been briefing the government on the implications of Brexit for oil and gas producers once the UK has left what is now the EU-28. That is due to happen in March 2019 – but on terms that have yet to be decided. 

At stake are the efficiency gains made in the previous few years, allowing producers to be more profitable now than when oil was $120/barrel. They are dreading delays to projects if the UK is excluded from EU customs arrangements, as vital spare parts – there is very little redundancy in inventories – are held up in dockyards while UK customs officials get through the paperwork. They need to be waved through on arrival, as they are now, or costly delays and falls in oil and gas production will be part of life. The ending of some kinds of import duty relief is also a risk: equipment meant for offshore use is exempt under EU law, as well as on goods already imported and warehoused for later use. Upfront duties would total hundreds of millions of pounds, and then about £12omn/year after Brexit. 

Staffing is another area: a tenth of the workforce is from outside the UK, and of that, half is from outside the EU. Possessing highly specific skills, they are nevertheless on the “cumbersome, costly and prolonged” Tier 2 visa process. Extending that to process to EU workers or training a specialist UK labour force would cost a lot, in terms of money and time.  

Aviation is another area that could become costlier after Brexit: helicopters may now fly from Denmark to the UK and then on to Ireland without any restrictions. Using different aircraft and crews could add considerable cost and bureaucracy to offshore operations. OGUK has raised this also with ministers: “There needs to be more dialogue with the rotary industry by the UK government with regards to Brexit…. Rotary aviation is vital to support the oil and gas sector and other markets and should be involved in these important discussions.” 

Spokesman Gareth Wynn told NGW it had taken a deliberately apolitical, pragmatic approach to the question: ‘we are more interested in the outcomes for industry than the way in which the deal is reached.” 

The encouraging news is that OGUK’s representations have had a “pretty good hearing” from the government's Department for Business, Energy and Industrial Strategy (Beis), the Department for Exiting the EU (Dexeu), and the finance ministry, he said. 

OGUK is working to ensure that the UK’s voice is heard in Brussels, particularly as the UK is the biggest producer in the EU, and protecting the licence to operate is key, in an EU dominated by nuclear and renewable energy production. There are about a dozen pieces of regulation, Wynn says, that could make it more expensive to operate oil and gas fields offshore, including the Environmental Liability Directive, the Offshore Safety Directive and the Marine Strategy Framework Directive. “Without a voice at the table the risks are potentially significant,” he said: “Other countries have less at stake than we do. 

“For any deal to be good, it must reflect these concerns to the largest degree possible. Anything that unwinds the hardwon gains in efficiency will be very unwelcome,” Wynn added. 

However there is some help from OGUK’s sister organisations in Europe, including the International Association of Oil & Gas Producers (IOGP). 

OGUK is still waiting to hear from minister Dominic Raab’s Dexeu about contingency plans for a no-deal Brexit in relation to the upstream, which is expected this month. Wynn said that OGUK would respond in one go to that, and to the Chequers exit plan, which was agreed by the UK cabinet on August 7.  

All eyes on West of Shetland