A giant has provided what sounds like a big vote of confidence in the North Sea but those concerned about the prospects for the key oil and gas industry may be unwise to get too excited about it.
Firms in the North Sea have been caught in the eye of a storm in the last year as the slump in oil and gas prices triggered by the coronavirus crisis and associated logistical complications have posed huge challenges.
A range of firms have slashed spending, causing pain for a supply chain which emerged in feeble shape from the downturn caused by the fall in oil prices from 2014 to 2016.
BP announced on Tuesday that it had slumped around $6 billion (£4.4bn) into the red last year on an underlying basis after making $10bn profit in 2019.
It lost around $25bn on a bottom-line basis in 2020 after slashing the valuation of its oil and gas assets by $12.8bn.
READ MORE: North Sea veteran to lead BP though 'transformational era'
New chief executive Bernard Looney has announced plans to reinvent BP as an integrated energy firm that can play a big part in the fight against climate change.
BP’s investment in renewables is set to increase while oil and gas will become a smaller part of the business.
Against that backdrop, few would have expected to hear positive noises about the North Sea in the briefing BP bosses gave to analysts. BP has retrenched significantly in the area in recent years.
However, chief financial officer Murray Auchincloss included the North Sea in a list of eight core areas on which BP will focus oil and gas activity in coming years.
It expects to use the cash generated from these to fund investment in renewables projects that could take years to achieve payback, while making big payouts to investors.
READ MORE: Scottish energy giant exits North Sea with cut-price sale of gas production business
The fact that the North Sea is included by BP in the same division as areas such as the Gulf of Mexico and the Middle East is striking. The North Sea faces fierce international competition for investment.
The pat on the back for the North Sea from BP came weeks after Royal Dutch Shell also included it in a list of core oil and gas areas.
However, despite providing what seemed like good news, Mr Looney indicated that any hopes that BP will provide the kind of boost to activity that the North Sea needs may be in vain.
The North Sea and other core areas only made the grade because BP expects to generate so much cash from them during the time it will take to get operations in markets such as offshore wind and hydrogen fuel production to the required scale.
Mr Auchincloss said BP expects to be able to replace earnings from hydrocarbons by the late 2020s or early 2030s.
READ MORE: North Sea output to fall to 'nearly nothing' by 2050 experts warn
The implications for investment in the North Sea and jobs are sobering.
With the oil and gas businesses set to be run as cash engines it seems unlikely that BP will invest in the kind of big greenfield developments that would provide most benefit for the supply chain. Relatively small-scale projects close to existing assets may be the best that can be hoped for.
BP will maintain a relentless focus on costs in an area in which it cut hundreds of jobs during the last downturn. The company is in the process of shedding 10,000 jobs around the world, 11 per cent of the total, to help cope with the challenges posed by the coronavirus crisis and to get it in shape for the energy transition.
It has not said how the cuts will impact on the North Sea business run from Aberdeen. However, North Sea jobs numbers appear to have fallen in recent months. The company employs around 1,000 in its North Sea business, compared with 1,150 in June.
READ MORE: Aberdeen job cuts loom as Shell retrenches
Last month Shell announced plans to cut around 330 jobs in its UK North Sea oil and gas business.
BP may offload more North Sea assets to help it achieve its debt reduction targets.
In January last year it agreed to sell stakes in two big fields to Premier Oil for $625m then accepted a cut in the cash price after the oil price tanked.
Premier subsequently shelved the deal after agreeing to merge with private equity-backed Chrysaor, leaving BP wondering what to do with the assets.
Norwegian private equity firm HitecVision is in talks to acquire the bulk of the North Sea portfolio amassed by US supermajor ExxonMobil during a near 60-year association with the area.
READ MORE: US oil giant in talks to sell bumper North Sea portfolio
ExxonMobil sees better prospects elsewhere.
The classic private equity model involves looking to maximise returns from investee businesses so that they can be sold at a profit within four or five years.
Industry leaders hope that the North Sea supply chain will benefit from the energy transition. The argument goes that the geography of the area combined with expertise developed over decades of oil and gas activity make a winning formula.
Industry body OGUK (Oil and Gas UK) is trying to get the Westminster government to provide support through a North Sea transition deal.
The Government has made positive noises, but it remains to be seen if it will provide help quickly enough.
READ MORE: Floating windfarms could power North Sea resurgence with right support
Companies in the supply chain have used the Government-funded furlough programme to try to preserve jobs. The programme is due to run out at the end of April.
Critics have expressed doubts about how committed some oil and gas firms are to tackling climate change.
This week Greenpeace said oil and gas firms in the North Sea were pumping out the equivalent of a coal plant’s worth of emissions each year through flaring and venting. The claim was based on an analysis of data covering the five years to 2019. Noting that Norway banned non-emergency flaring in 1972, Greenpeace said the UK Government was asleep at the wheel.
“To stand any chance of meeting our climate targets we need strong government action to regulate this industry and secure a safe and fair phaseout of oil and gas that supports workers and communities,” said Greenpeace’s Mel Evans.
In response, OGUK said: “We know that there is more work to be done and we’re already in action to ramp up our response as an industry. As one of the first industrial sectors to set out our roadmap to net zero, the UK’s offshore oil and gas industry has committed to clear sector-wide targets to halve all our emissions by the end of this decade before reaching net zero in 2050.”
READ MORE: Aberdeen oil services firm's progress in renewables recognised by City analysts
The findings of a recent study of senior North Sea professionals by risk management firm DNV GL suggest firms are taking the energy transition agenda seriously.
Some 72% of respondents said the organisation they worked for was actively adapting to a less carbon-intensive energy mix.
But around half, 46%, said their organisations were more focused on short-term than long-term strategies, while 45%, expected headcount to decrease.
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