Concerns over the potential impact of the Forties pipeline shutdown added a bump in the road of what had been a far more positive 2017 – with a more stable oil price supporting performance across the North Sea quietly welcomed.
There were clear and present risks for companies which had perhaps targeted riding-out the year after surviving the trials of the previous 2 years, with the abrupt suspension of half the basin’s production raising questions for owners and employees at a difficult time.
Any shutdown theoretically hits the supply chain and for those with an already tightened belt, cash-flow problems could arise, though most would have hoped they had enough in reserve to see them through an interruption that lasted about three weeks.
More broadly, 2017 saw a gradually increasing level of confidence via a recovering oil price, and significant reduction in costs providing a sustainable economic case for the North Sea in the medium term.
This increased confidence is perhaps best seen in the level of M&A deals completed in offshore assets with several examples of new entrants which should drive activity as they invest in existing assets and infrastructure.
We saw a significant new player emerge in Chrysaor via the purchase of former Shell assets, the new independent Spirit Energy recently created from the merger of Centrica’s E&P business and Bayerngas Norge, and a strong response to new licensing rounds indicating positivity which was previously in short supply.
The relatively stable oil price, at $55-65 a barrel, also gives established businesses confidence that they can plan ahead knowing the economics are more supportive of their investment case.
There is also good news for innovators and new technology entering the supply chain as the industry supports and stimulates developments which can further drive down costs and improve efficiency.
Key amongst this support is the role of the Oil and Gas Technology Centre (OGTC) which is providing funding support and stimulating collaboration by bringing the major operators alongside technology businesses to deliver the best solutions for the long-term benefit of the industry.
A potentially unexpected issue of this returning confidence and activity will be the ability of companies who have been managing cash flow on an extremely tight basis, to fund growth in working capital.
Anyone looking toward growth and new opportunities may find it challenging to access debt funding from the banks to support the level of investment they require, or additional working capital – particularly if the past two years’ accounts haven’t been positive.
Without being able to access appropriate debt funding, some businesses may miss out on opportunities and end up being left behind by competitors. This potential funding shortfall is a key issue for the industry and can be addressed in a number of different ways with increasing options for debt, alternative debt and equity solutions.
By Graham Alexander, Corporate Finance Partner and Head of Oil & Gas, Johnston Carmichael
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