The year 2018 exhibited several major changes to the operating environment for the North Sea oil industry. The dramatic fluctuation in oil prices was an obvious and key feature. Starting at around $60 in January the Brent price climbed to a peak of around $85 in late October and then fell dramatically to below $60 at the time of writing. The increase was fostered by threats of severe sanctions against Iran by the US Government plus continued stagnation of production in Venezuela. The subsequent granting of many waivers to the sanctions plus evidence of continued growth in US production and signs of weakening world demand growth produced the dramatic fall in recent weeks. The announcement of production cuts of 1.2 million barrels per day by OPEC and collaborating countries, particularly Russia, produced only a minor increase in the price. The future outlook is very unclear. For example, sanctions on Iran could be tightened at some future date.
All this is of great importance to the North Sea where cash flows from existing production and investment in new developments are both very sensitive to oil price behaviour. The industry will have ended 2018 in a cash positive position and with a reasonable expectation of a modest increase in aggregate production in 2019. A substantial number of new field development approvals were awarded in 2018 some of which should start in 2019. But total long term new investments are still subject to much uncertainty. The present writer and Linda Stephen found that a significant number of the undeveloped discoveries could be economically viable at oil prices in the $60-$70 range. But if investors screen their new project at prices below $60 the number of viable projects decreases noticeably. Hence the concern at the recent price fall.
Over the past few years the industry has executed very painful cost reductions. These can ensure that some new developments which otherwise would have failed the investment hurdle now proceed. But if costs (per barrel) start to rise the viability of some new projects will be put in jeopardy. Costs per barrel can be contained by technological progress which enhances productivity. It is to be hoped that 2019 will see the wider adoption of more of the new technologies currently being promoted by the OGTC. The development of the many small pools in the UKCS depends substantially on this.
The last few years have witnessed a large number of asset transactions in the UKCS with many new entrants acquiring mature fields. This has been facilitated by the introduction of Transfer of Tax History arrangements as part of these transactions. The primary legislation is currently going through the Parliamentary process. The net effect should be increased late field life investments by the new asset owners who will be given enhanced comfort about obtaining tax relief for decommissioning costs. Hopefully there will be positive signs of this in 2019.
Next year should also see signs of more collaboration within the industry. This can make an important contribution to the formation of cluster developments relating to the many small pools of undeveloped discoveries. The OGA has a key role here in fostering the development of such clusters. This is generally complicated by the presence of several different licensees across the potential cluster. The OGA has an important role to play in harmonising what may otherwise be misalignment of interests among the parties. It is to be hoped that progress will be enhanced in this area in 2019.
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