THE shifting economic climate has created a toxic mix for the North Sea oil and gas industry.
Low oil prices and a scarcity of credit have seen oil production and exploration decline dramatically over the past 12 months, however, with signs the lending freeze may be starting to thaw, is the barrel half full or half empty?
The tightening credit conditions have proved a major challenge to the oil and gas industry. Although there are signs the situation is improving, smaller entities are still struggling to secure sufficient finance and are suffering from a cash shortfall.
Service firms with high levels of debt are also still going to find it difficult, and may find the banks inflexible and costly when covenants are breached.
That said, there are few rays of light. The good news is that we are starting to see a pick-up in the transaction market, with several asset and corporate takeovers occurring. Private-equity firms also appear to be becoming more active in the sector, and strong management teams are forming. These trends will hopefully help to stimulate oil production and exploration, as new owners tend to be more willing to invest in developing their assets further.
Oil prices have already rallied from their low of about $35 in December 2008, and the expectation is that gas prices will follow suit. The prospect of better returns should encourage investors to bring North Sea oil fields into production.
Clearly it isn’t all doom and gloom; the future outlook, although far from certain, is becoming more positive.
The biggest threat to the sector’s recovery is perhaps the prospect of additional taxation as the UK Government seeks to address the issue of public debt.
Alec Carstairs is oil and gas partner at Ernst and Young