THE prospect of a recovery in North Sea investment remains slim despite the oil price rally that has been powered by hopes that coronavirus vaccines will be made widely available soon, experts have warned.
With the outlook for the global economy mired in uncertainty, they think North Sea oil and gas projects will face increasing competition for funding as investors focus attention on sectors that appear to have better prospects. These include renewable energy.
READ MORE: Scottish energy giant exits North Sea with £120m sale of gas production business
A “spike” in job losses may be in prospect when the coronavirus furlough programme ends in spring.
However, bargain hunters could decide now is a good time to buy North Sea assets as tough times in the industry encourage a shake-up in the area.
The price of Brent crude has risen by around 40 per cent since October, with good news on the coronavirus vaccine front expected to spur increased demand for energy.
But specialists at leading accountancy firms seem to agree that while the macroeconomic picture may have brightened in recent weeks the prospects for the UK North Sea have not improved much.
Oil and gas firms have slashed investment in the area this year in response to the economic turmoil triggered by the Covid-19 coronavirus crisis. With Brent crude selling for around $51.40 per barrel the price remains well below the levels of around $70/bbl recorded in January.
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It would probably require a stronger and longer rally in oil and gas prices to encourage firms to dust off plans to invest in North Sea projects.
Regarding the prospects for investment in the UK North Sea, Drew Stevenson head of energy at PwC UK, said: “A recovery even in the most optimistic Covid-19 scenarios, will take time.”
He added: “Global supply demand market fundamentals suggest we are in a period of ongoing oversupply, putting downward pressure on oil prices. This in turn may dampen some investment plans.
“More broadly, investment plans tend to reflect long-term project economics in a sector where traditional hydrocarbon capital allocation is competing increasingly with low carbon spend.”
Martin Findlay, senior partner in KPMG’s Aberdeen office, sounded a similarly cautious note.
He said: “The sector has been hit hard and it will take time to regain lost ground as companies consider their options. Whilst many capital projects were halted suddenly, reactivation is usually a slower process.”
Mr Findlay added: “The ability to finance projects could be the biggest challenge ahead with sources of capital becoming increasingly difficult to access, as investors become bolder and more attracted to green lending options. “
While the challenges are likely to be intense in mature areas of the North Sea, hopes remain that there is potential in relatively under-explored regions
“The West of Shetland remains a frontier hot spot and investment will continue there, among other areas of the basin,” said Mr Stevenson.
He noted that investment in renewables and in the decarbonisation of the production of oil and gas will create valuable work for the supply chain. The UK Government’s Energy white paper’s target to make the basin net zero by 2050 will provide a fillip to energy transition projects. However, it seems unlikely that any resulting boost will be enough to offset the impact of cuts in spending on new oil and gas assets and on upgrades.
Mr Stevenson said: “While the supply chain and operators delivered significant efficacy gains after the 2014 oil price crash, the scope for savings is much more limited this time round … All this and with oil and gas companies still reducing capex spend, suggest the outlook for the sector looks challenging.”
Following a year in which around 12,000 jobs are thought to have been lost in the North Sea, the implications of such an analysis for employment in the area are alarming.
READ MORE: Can green energy revolution create enough jobs to make up for Scottish oil decline?
Mr Findlay noted: “The latest Oil & Gas Survey, from KPMG and the Aberdeen & Grampian Chamber of Commerce, found that almost 50 per cent of contractors had already cut staff and an overwhelming majority had placed large numbers of employees on furlough. As furlough winds down in the Spring, there are fears we could see another spike in job losses.”
But mergers and acquisitions activity will continue. Some investors reckon moves by firms to cut their exposure to the North Sea could create opportunities to buy asset at attractive prices. Shortly before Christmas, Viaro Energy struck a £120 million deal to buy SSE’s North Sea gas business.
“Opportunities for targeted acquisitions and consolidation in the UK North Sea will likely continue as the sector is disrupted by market fundamentals and the ongoing momentum of the energy transition,” said Mr Stevenson.
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