Report highlights UKCS profitability slide

The slumping profitability of oil and gas work offshore the UK is evident in a new government report.

According to the Office for National Statistics (ONS), the net annual rate of return for companies working in oil and gas extraction on the UK Continental Shelf (UKCS) fell to 15.2% for all of 2014, down sharply from the previous year and the lowest level since the report began in 1997.

While the UKCS rate was higher than the combined rate for all private nonfinancial companies, 11.9% for 2014, ONS warned against comparison.

“Due to the nature of the capital assets employed, net rates of return for continental shelf companies are not directly comparable with those for other industries,” it said. Other categories in its report are manufacturing and services.

Net rate of return is operating profits as a percentage of capital employed net of capital consumption, such as depreciation. For UKCS companies, capital employed is mineral exploration costs and oil rigs plus inventories of raw material and fuel used in production.

The annual net rate of return for UKCS companies has fallen each year since peaking at 42.1% in 2011.

The net rate of return in the fourth quarter of 2014, 10.4%, also was the lowest quarterly figure in the 8 years of data.

Noting the large drop in the annual net rate of return from 26% in 2013, the ONS said, “Although the profitability of these [UKCS] companies may have been affected by the recent decline in oil prices, they have seen their net rate of return decline since 2011, and therefore other factors may be relevant.”

More than price

Malcolm Webb, chief executive officer of Oil & Gas UK, agreed that attributing the profitability decline solely to the oil-price drop would be “a grave mistake.”

Initiatives by the government to lower the tax burden on producers and streamline regulation must be accompanied by cost reduction in the industry, he said (OGJ Online, Feb. 25, 2015).

“Unless the underlying cost and efficiency challenge is first tackled and overcome, the productive future of the UK North Sea will be severely constrained, and there will be a very much smaller industry to tax, regulate, and invest in,” he warned.

Webb added: “We need to see a 40% improvement in unit operating costs if we are to secure jobs and investment for the medium and longer term.”

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