UK to Avoid Production Shut-ins: Rystad

The UK North Sea will avoid shut-ins and exploration will likely continue in 2020, even if Brent falls to $20/b, but cash flow and project sanctions will suffer, Norway's Rystad Energy said in a research note on April 17.

Some 30,000 boe/d of production will be unable to cover short-run marginal costs at $20/b oil, but most operators will want to keep facilities running even at a loss and get profit back when oil prices recover, rather than shutting them in prematurely, Rystad said.

Final investment decisions on projects will be few and far between, and only 34% of unsanctioned resources are commercial at $30/b oil, and none are viable at $20/b.

“As a result, we expect sanctioning activity to be low in the current price environment, not only because of the breakeven price of the projects but also because operators will tend to be cautious over the scale and pace of future capital spending commitments, “ Rystad analyst Sonya Boodoo explained.

Exploration will also take a significant hit. But drilling levels will be more affected in 2021 than in 2020, as most of this year's wells have already contracted rigs. Only two of the planned 2020 wells have not secured rigs, and both were recently deferred. Based on Rystad's forecast of an average oil price of $34/b in 2020, the consultancy expects UK upstream activity to be cash-negative in 2020, with free cash flow at -$1.3bn. This deficit will widen to $3.4bn at $20/b oil.

The last oil price crash led to a wave of private equity-backed acquisitions, but Rystad doubts that this will be case this time around, because of difficulties obtaining financing for purchases as a result of price uncertainty and growing decarbonisation sentiments. The latest price rout has also led to companies deferring divestment plans.