North Sea executives outline frustrations, hopes for future

Offshore staff

LONDON – The North Sea must adapt quickly to ensure a strong, productive, and profitable future for the sector, according to 37 senior oil and gas executives in the UK, Norwegian, and Dutch sectors interviewed for Price Waterhouse Cooper’s (PwC) latest report A Sea Change.

Although the industry has made progress in tackling cost efficiency and implementing recommendations from the 2014 Wood Review, any inertia could lead to a steady decline, the report suggests.

Those canvassed expressed optimism that with the right leadership, innovative strategies, intervention, and cooperation between operators, oil field service sectors and government, North Sea production could be extended by a few more decades. 

The UK, however, would require a transformation in many ways, driven by government, the Oil and Gas Authority (OGA) and the industry.

Alison Baker, PwC’s UK and EMEA oil and gas leader, said: “During our interviews we picked up a real sense of urgency to create one last cycle of success that will retain and generate jobs, stimulate growth, and ensure security of energy supply. But this was matched by a level of frustration at the fundamental issues that need tackling to avert the risk of rapid and premature decline.  

“Part of the solution is for government agendas across Treasury, DECC, and the OGA to be much better aligned to the needs of the whole industry, from super majors to smaller oil field services firms.

“The majority of respondents also want government to take a lesson from Norway and Saudi Arabia and be bold in setting out their blueprint for the future. This must incorporate onshore activity as well as defining how the North Sea basin will evolve in the short to medium term and, crucially, how the end game - and subsequent transition to a low carbon landscape - will be managed.”

Historically, the report points out, the larger operators have exported their best management talent to frontier basins, a move that has potentially stifled innovation in the North Sea.

The growth of independents, bringing new expertise and investment, has also fostered fragmentation across the basin.

Respondents acknowledged a need for innovation and re-invention while demonstrating entrepreneurial and forward-thinking leadership. They also called for the OGA to lead more from the front, being more assertive in changing behavior.

New approaches that might re-invigorate the basin, the respondents suggested, include:

  • Forming a super joint venture that would consolidate smaller and fragmented assets under one sole operator. This could drive greater cost-efficiencies, improve bargaining power with suppliers, and lead to more co-ordinated decommissioning of the asset pool.
  • Consortium financing with collective counterparty risk, focused on area-based rather than asset-based outcomes. Traditional providers of capital have pulled back as oil prices have slumped – this solution might help break the gridlock.
  • A government-backed decommissioning fund or equity-backed guarantee scheme to help smaller companies cover their letter of credit requirements. With government assuming a degree of risk with the majors, independents could focus on maximizing the last drops of oil and gas from the basin.

Technology and innovation were other areas highlighted for improvement in the UK sector, along with a change to offshore shift arrangements in Norway, where the current rotation model and high wage levels means the average employee cost is currently 85% higher than the UK equivalent.

For Dutch respondents, the priority was recognition that low gas prices are now accelerating the demise of the basin, leading the industry to plan for decommissioning within the next five-15 years. Future investment is most likely from renewable markets such as tidal energy and offshore wind.

Kevin Reynard, PwC Office Senior Partner in Aberdeen, said: “The North Sea still has a strong couple of decades ahead of it but the decisions to sustain it in that period need to be taken quickly.

“It’s vital that governments and industry come together and agree a blueprint for action. No one company standing alone can weather this but if all interested parties join forces to address the issues then there is hope for the North Sea. Government and industry have started to come together but this can be built on for the future.”

06/13/2016

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