As we approach Offshore Europe 2017, it’s worth considering the progress that the oil and gas sector has made in the UK since the previous conference in 2015.
Firstly, it is important to note what hasn’t changed – regrettably the oil price is stubbornly similar to the price on the opening day of Offshore Europe 2015 (8th September 2015) $48.88 versus the $51.75 at the time of writing this article. Moreover, the oil price outlook continues to be fairly flat so we can expect more of the same, at least through 2018.
However, there are number of areas where significant progress has been made in response to the low oil price including: a significant reduction in unit operating costs; 2016 saw more oil and gas discovered in the UKCS than at any time since 2008; E&P companies should return to producing free cash flow this year; production from the basin has grown; tax rates have fallen; and merger and acquisition activity has increased significantly.
However, we are not out of the woods yet. Investment remains at almost half of the peak in 2014 and is forecast to fall further over the next two years; drilling activity continues to be depressed; fresh capital is needed to ensure that significant production decline doesn’t occur post 2020; and the supply chain continues to be under pressure.
So the mood remains one of cautious optimism, with an unwavering focus on operational efficiency, and very strict management of capital.
Both the Westminster and Holyrood governments have been conscious of the impact of the lower activity levels in the sector and, as well as the reduction in upstream taxes, the city of Aberdeen and Aberdeenshire were successful in being awarded £250m of investment funds. Much of those funds will be spent on the Oil and Gas Technology Centre (OGTC) which was officially opened in February this year. With an ambition to inspire, accelerate and fund technology and innovation the OTGC demonstrates a desire to ensure the long term future of the oilfield services sector to the local economy.
As important to investment in the OTGC, and more general investment in the City and region’s infrastructure, is the creation of an optimistic narrative for the area. With the perception in some people’s minds that the economic bubble has burst in the North East, we need inspirational leaders to articulate a vision for the future which is attractive and motivating to the next generation. The Aberdeen & Grampian Chamber of Commerce is working hard to galvanise the business community to focus on the positive change already happening in the region with initiatives such as their investment tracker which highlights £8.9bn of investment is committed to our region. Opportunity North East, created in 2016, is also playing an essential role in encouraging diversification of the local economy whilst still playing to our strengths in oil and gas and other traditional industries like agri-food. However, we all have a role to play in promoting the business opportunities that exist in the North East and in reminding people that the City and shire are two of the most attractive locations to be based in the whole of the UK.
For those of us attending Offshore Europe 2017, let’s do so with renewed confidence in what our local economy has to offer: a highly trained and experienced workforce; a great education sector with universities we are proud of; an entrepreneurial spirit that saw us conquer the challenges of the UKCS; a world-leading expertise is certain aspects of oil and gas; a strong but underappreciated developing industry in bio-technology; a great brand around agriculture that we can do more to promote; and a latent opportunity for much greater tourism as we offer access to areas of outstanding natural beauty.
Let’s start to realise our potential.
Derek Leith is Energy Voice’s Guest Editor and UK head of oil and gas at EY.
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