UK Upstream Grows Under Pressure: Report

The UK upstream industry will have to keep focusing on keeping costs down, given uncertain commodity markets, according to the Oil & Gas UK (OGUK)'s annual report into industry performance published March 20.

Investors are acting cautiously and exploration and production companies remain focused on cost whilst striving for further business and operational improvements, says the Business Outlook 2019. Nevertheless, after 14 years' decline, production has risen by a fifth over the past five years and continues to provide around 60% of the UK’s oil and gas demand.

While the report finds 62% of contractors have an improved outlook for 2019, many areas of the supply chain are still experiencing challenges as industry emerges from one of its most difficult downturns, the report says.

New findings in the report reveal that the upstream will have to spend £200bn ($264bn) on existing operations and new opportunities to extend the productive life of the UK continental shelf to 2035. 

Companies are looking to maintain unit operating costs at current levels, running at around £7-7.5bn this year. 

The largest ten E&P companies accounted for just over half of production in 2018 compared to more than two-thirds in 2008, reflecting an increasingly diverse corporate landscape.

Despite the low level of activity, up to 485mn boe have been discovered so far from exploration wells drilled in 2018 – a similar total to discovered volumes in Norway but with 20 fewer wells.  More new projects were approved in 2018 than the previous three years combined, unlocking over £3.3bn of new capital investment and more than 400mn boe of new reserves, and a similar number is expected in 2019.

OGUK CEO Deirdre Michie said: “Our Business Outlook Report 2019 shows that industry’s approach during the downturn is delivering results.... Our report finds an industry that’s getting better at what it does, getting smarter in how it does it and is well positioned to deliver attractive returns on investment within this environment, maintaining our global competitiveness. This is the new reality and we need to embrace it.

“However, challenges remain across parts of the supply chain, with revenues and margins still under pressure and cash flow stretched. If capabilities and resources are to stay anchored here in the UK, there must be a competitive proposition for supply chain companies to invest in too.

“This is a UK industry which is critical for security of energy supply, at the heart of the move to a lower carbon economy, supports hundreds of thousands of jobs and contributes billions to the economy," she said.

But it is not a uniform picture where everyone pulls together: a series of ongoing strikes by Unite members at plant owned by the French major Total shows tensions between producers' profits now comfortably higher than the downturn years; and workers' terms and conditions.

Commenting on the report, consultancy Deloitte said despite significant pressures that remain on the oil and gas sector, "this year’s Outlook does also demonstrate the industry’s ongoing resilience and optimism, particularly evidenced through the improvements in production, production efficiency and new field approvals.

“The on-going levels of M&A activity also indicate that the appetite to invest in the basin continues to be positive. That much of this activity in 2018 related to the transfer of assets, helping to ensure that investment opportunities are in the most appropriate hands, and creating a more diverse corporate landscape, is hugely encouraging given the importance of this in achieving the maximum economic recovery from the UK continental shelf.

“However, fresh and forward-thinking approaches to collaboration and business models in the oil & gas industry remain crucial to ensuring the UKCS’s competitiveness and longevity as well as supporting that of its critical supply chain mass.”