Major oil and gas operators may withdraw from less profitable parts of the North Sea over the next year but that shouldn’t be viewed as a bad move, according to one of the industry’s leading economists.
EY’s Derek Leith, an oil and gas tax specialist, cites the firm’s recent report Capital Confidence Barometer, which showed market activity finally heating back up.
The industry survey found 74% of respondents expected their mergers and acquisition pipeline to increase over the next 12 months. It comes as the North Sea oil and gas industry emerges from one of the gloomiest periods in its lifespan.
Opec-led production cuts have, in the main, brought the oil price back to an equilibrium, Mr Leith said, and this stabilisation helps nurture optimism in the sector. And in turn the economist expects more of the major operators to look to balance their books by “highgrading” their portfolio to developments with a low lifting cost and enough reserves to make it worth their investment.
He said this could lead to more announcements like US major Chevron’s recently revealed plans to market all of its central North Sea assets – “portfolio optimisation”, in industry lingo.
Mr Leith said: “In some instances such rationalisation has been on the cards for some time, but companies were loth to dispose of their assets cheaply when the oil price was low. As the view of the future oil price for both buyer and seller converges, the possibility for deals that have been contemplated for some time will convert into reality. What this means for the UKCS is we can expect a series of transactions over the next couple of years, which will see some of the most well-known groups who have invested in the basin withdraw as they focus on only the largest fields and prospects either in the UKCS or more likely elsewhere.
“Such a change will be seen by some negatively but actually these fields passing into the hands of new owners is much more likely to lead to new investment, an extension in production life, and the development of smaller fields ancillary to existing infrastructure.”
There may also be the added bonus of a “consolidator” emerging from the new investors, taking on these offloaded assets. He added: “The current multitude of different operators in the UKCS makes lasting cost reduction and operational efficiency more difficult than a smaller number of players with greater scale. The scaling back or exit of the groups who have invested in the UKCS should be embraced, as it offers the chance to improve the basin’s international competitiveness and fresh opportunities for the next generation of our industry’s workforce.”
This, he said, could create that scale and opportunity to deliver a new operational model which would help maximise the exploration of the UK’s natural resources – a much needed game-changer.