Oil Prices Lay Groundwork for Higher Margins, but Only for Big Players
Governments could soon chip in to support continued investments in the North Sea, in the attempt to reverse the current gloomy trend both in the United Kingdom and Norway. These investments could then translate into higher margins for major players, while smaller companies might be the last to reap the benefits of increasing public support.
At the same time, current market conditions might turn out to be positive for the industry in the long run also for another reason. Low prices are expected to bring along helpful rationalisation measures, which will have a positive impact on the bottom line.
In this sense, a current commitment from the government and simultaneous private readjustments - like the one announced by BP on Thursday - will turn out to be key for future profitability. This is especially the case for big players with large budgets.
‘High costs and weaker oil prices could drive necessary readjustments that will strengthen the petroleum industry over the long-term’ the Norwegian Petroleum Directorate wrote on Thursday.
READJUSTMENTS NOW (AND PUBLIC SUPPORT) FOR FUTURE PROFITABILITY: THE UK
Given the present difficulties, experts see room for tax changes. The UK is a clear example.
“Over the last 12 months, both industry and government have recognised the need for change on the UKCS. We have started to see some positive steps taken in that direction, with the recommendations made in the Wood Review and tax changes announced in the Autumn Statement among them," Graham Sadler, managing director of Deloitte’s Petroleum Services Group, commented in an emailed statement.
In its last report, Deloitte found that 40 wells were drilled offshore UK throughout the year, which means a 20% decrease with respect to 2013. According to the consultancy firm, drilling levels could increase only through a strong guidance of the new industry regulator Oil and Gas Authority (OGA).
“It will also need further clarity from Government over the fiscal incentives that will be made available to support exploration and appraisal activity” Sadler added.
In this sense, if cost cuts will inexorably translate into lower production in the near future, there is also another side to the story.
According to several experts, BP's decision to cut down 300 positions in the North Sea shows how companies are focused on cost reductions to overcome the effects of low oil prices. Similar decisions will then have positive effects on companies' profitability.
"A cost reduction now could lay the foundation for ensuring robust profitability over time” NPD Director General Bente Nyland commented in a separate study.
WHO WILL BENEFIT?
The report by Deloitte sheds light on the necessary steps to overcome current problems. It also suggests that large players are the main winners of the present situation. According to the analysis released on Thursday, the number of field start-ups more than halved in 2014. This fact, coupled with financial difficulties of companies with limited budgets, could close some doors to smaller players.
“Last year saw a reduction in the number of deals taking place in the North Sea, despite a large number of assets being available on the market. Price pressure and access to finance were issues for the most likely buyers – smaller companies with limited budgets – creating a price differential in the market and stalling deal activity” Derek Henderson, Deloitte’s Aberdeen Office Senior Partner, commented.
Accordingly, the first days of the year witnessed some deals for assets in the North Sea, hinting at a clear market consolidation trend in the UKCS.
On Tuesday, for example, Edison announced the execution of a put&call option agreement with Apache Beryl, which will allow the Italian company to reach an overall UK production of 6,500 barrel of oil equivalent per day.
“While it is not the only consideration, it is likely that if the oil price remains low assets will become more affordable to some of the region’s more cash-rich players who may be looking to invest in the UK basin” Henderson explained.
NORWAY: ANOTHER CASE OF COMMITMENT
Also on Thursday, Norwegian authorities intervened to stave off doubts about Oslo's intentions. Officials and politicians renewed their commitment to the Norwegian Continental Shelf. Despite some clear difficulties around the corner, their declarations left no doubt.
"The petroleum activities are our most important industry and will remain so for decades to come. It is important to maintain a long-term perspective for such a capital-intensive sector, where investment decisions and deliveries are many years apart. Led by the major Sverdrup development, the updated investment forecasts for the sector show that activity on the shelf is robust," Minister of Petroleum and Energy Tord Lien said on Thursday.
The statements comes a few hours a NBP report, which suggested that spending will decrease by 23% through 2017. According to NBD’s figures, investments are expected to fall not only in 2015, but also in the following two years.
In 2015, investments should register a year-on-year contraction of 15%, with an additional 8% decrease over the following two years. The investment levels are expected to slightly increase in 2018.
NBD’s Nyland also explained that the production forecast was based on December crude prices, adding that Norwegian investments could fall further if oil prices remain in the $50-$60 range.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci