Aberdeen businesses, whether they are concerned with oil and gas or other industries, are not immune from the global economic challenges faced by UK banks and other financial investors.
The availability of finance is one of the major issues faced by both oil and gas services and exploration and production (E&P) companies in the north-east, particularly in the E&P space with regards to both extending the life of existing fields and investing in new fields which increase the use of existing infrastructure.
E&P companies have traditionally accessed finance through one of two routes; either debt provision from banks or equity investment, largely through the stock market, but increasingly from private equity houses. Both routes to finance are not without their troubles.
Aberdeen has seen a number of new entrants to the banking market, some traditional UK lenders, others new to the UK.
While new banks are arriving on the scene in Aberdeen the length of time which it can take for funds to be approved can still be an obstacle.
The criteria for lending have changed such that it is more difficult to obtain funding which is not asset or reserve backed and the options are fewer, increasing the cost of capital.
This means raising equity stakes also has a role to play in the region, but this form of investment is reliant on fiscal stability and favourable incentives such as relief for decommissioning.
A recent Oil and Gas UK report noted that some 470 installations, 10,000 kilometres of pipelines, 15 onshore terminals and 5,000 wells will all need decommissioning.
The total cost for this decommissioning is estimated at between £20billion and £25billion. Obtaining certainty as to the tax treatment of this future spending is vital to allow the economics of current projects to be assessed properly.
In raising equity capital, again, there are issues faced by companies looking for finance. The capital markets are experiencing volatility reflecting the fragility of economies and uncertainty in the eurozone.
Private equity houses, which invest in the sector, have tended to spread their risk by taking a portfolio approach rather than putting all their eggs in one basket.
There is still appetite from private equity in oil and gas (both upstream and oil field services), one of the few sectors for which we still see strong appetite, but that appetite, particularly in E&P, is fragile.
Overall, investment in the sector relies heavily upon fiscal stability but last year’s Budget produced a surprise tax rise affecting North Sea production. However, last week’s Budget sought to redress this with a number of measures, including the provision of tax allowances for new fields, valued up to £3bn, west of Shetland. Long term fiscal stability remains a major issue for UK and non-UK corporate considering whether to invest in UK fields so the outcome of consultation on decommissioning will be eagerly anticipated.
We are starting to see an emerging trend in the mergers and acquisitions market which may produce some funds for independent or junior companies aiming to advance exploration and development programmes.
In recent months we have seen a spate of acquisitions or stock market announcements by junior companies. Premier Oil’s £221million takeover of EnCore is one such example while speculation around Cove Energy, Bowleven and Ithaca all continue to fuel the fire.
Without continued investment it will be a challenge to maintain and extend the life of the core infrastructure which makes marginal fields viable.
The North Sea fields, although established, require infrastructure investment in the short term, otherwise the opportunity to develop marginal fields may be lost.
Conversely, investment is required in exploration and appraisal to identify fields which may be brought onstream to use existing infrastructure, otherwise with declining production in existing fields the maintenance of the infrastructure may become uneconomic, precipitating early decommissioning.
