Industry experts have given their perspective on what is happening in the sector, the price of oil, and the current challenges and opportunities there could be.
It follows the announcement by a number of companies, including BP and Schlumberger, that job redundancies would be made across their global and North Sea operations.
Graham Stewart, chief executive of Faroe Petroleum, said it would be the companies “with good growth prospect, strong balace sheets and good hedges in place who will ride this storm most effectively.”
David Rennie, international sector head of oil and gas at Scottish Enterprise, said the sector was a “resilient industry” which is used to “change and challenge”.
Read what they had to say below.
Chris Bird, managing director, MOL Group
“For those willing to set new standards in how to operate in mature basins, bring new ideas and with access to finance, the UKCS can be a very exciting place.
“We believe that in the long term the oil price will return to $80 – 100 per barrel of oil.
“We are working on long-term projects which are less impacted by short-term fluctuations in the oil price.
“We have a natural hedge with our downstream and mid-stream business along with onshore upstream, and for all of these reasons are continuing with our growth and investment strategy.
“A sense of urgency is required to make the basin competitive on a global scale, through a range of measures that will ensure long term vibrancy.”
Graham Stewart, chief executive, Faroe-Petroleum
“The industry is cyclical and we have been at this oil price and lower a few times before, and recovered every time. The uncertainty this time is how long it may last, and therein lies the risk for weaker, cash-strapped players.
“Costs have been rising for some time now and a correction was long overdue, as margins and economic viability of increasing numbers of projects have been squeezed.
“A drop in oil price, while generally unwelcome, will undoubtedly bring about a (hopefully much) lower cost base – if the drop lasts long enough that is.
“It will be those companies with good growth prospects, strong balance sheets, good assets and good hedges in place who will ride this storm most effectively. Unfortunately many (mostly small and medium sized) companies are over-leveraged, or under-hedged, or over-exposed to development projects with too high a break-even oil price – or combinations of these.
“Such companies may find it hard to find a smooth way through these rough waters, and may have to team up in one way or another with more robust companies.
“A big question is when will (or whether) the banks choose to take a hard line on companies with big borrowings. So far banks have not reduced their oil price decks for reserve base lending facilities, but they might at some point, with obvious consequences.
“Unlike last time when the oil price fell as a result of the financial crisis however, this time the banks have the liquidity to weather a period of uncertainty and hence not foreclose on their customers.
“Last time there were several companies who did not survive as a result of a lack of flexibility from the banks, notably Oilexco and Bow Valley.
“Let’s hope the banks can afford to be flexible for as long as it takes till prices recover.”
Stuart MacBride, chairman and chief executive, Trinity International Services
“Having been in the industry for 44 years we have seen the way that operators and contractors always adapt to the major fluctuations in the value of oil. It is a case of here we go again so batten down the hatches and try to ride out the storm.
“We survived CRINE (the ‘Cost reduction in the new era’ review the industry underwent in the mid-1990s) and I had the interesting challenge as a member of the CRINE Standard Contracts Committee to bring an SME contractors view to the creation of industry-standard contracts which are now known as LOGIC Standard Contracts. It did take cost out of the supply chain and I saw first-hand the savings that it brought.
“At that point operators brought pressure on suppliers, asking them to reduce pricing by 10% when our profit margin was already below that figure.
“The saddest part of any recession is the inevitability of good staff being lost to the industry. Many will move to work in other sectors and will not return when the marketplace picks up again.
“The pressures being exerted today have been encountered before – today we are asked to reduce costs while maintaining quality, the industry is responding and meeting that challenge. There will inevitably be casualties, but they will be far outnumbered by the survivors – this is another ripple in the water.
“The survival of Aberdeen as the oil capital of Europe is not in question and we will come out the other end stronger and wiser.”
Iain MacGregor, chief executive Global Energy Group
“Everyone does feel gloomy about the whole thing. If you are an E&P company you are really suffering. The big engineering companies will really suffer too.
“But the big recession back in 2009 allowed our business to grow to where it is today.
“We bought Sovereign Oilfield Group back in 2009/10 – that came as a result of these kind of conditions.
“We see this as a great chanced to buy companies. We are very acquisitive and have very low debt.
“We are fortunate we are quite diverse as a group. Some of our businesses will do well through this in Aberdeen because companies are looking to keep costs down.”
Colin Black, Chief Commercial Officer, Ace Winches
“As the Wood review stated, this is a time for collaboration and innovation, many companies have innovative solutions or just more effective practices that can significantly reduce overall costs to align with the low oil price, as long as there still is North Sea activity.
“The high oil price meant that everyone was just too busy to reflect, learn and develop. Ace Winches have their global HQ in the north east, work globally in many sectors including renewable, and have developed new products and cost saving initiatives with clients. Of concern is international companies with branch offices in the UK, if there is low North Sea activity they may downsize or close bases and move elsewhere.”
Jack Davidson, managing director of Fisher Offshore
“Throughout the downturn, the main priorities will be really in maintaining our high quality service model alongside remaining focussed on meeting client’s struggles in cost efficiencies.
“The cyclical nature of the industry is something we have restructured the business around using quality systems as both a method of delivery and cost savings. We aim to be prepared as possible for any scenario, with the key being the ability to react nimbly to this change.
“Fisher Offshore benefits from the larger global footprint that being part of James Fisher and Sons obviously brings, which gives us the ability to site equipment in global locations. Our aim during this period is not to affect the quality of delivery for profit but to service our clients, ensuring end satisfaction. Weathering the storm together really is going to be key.”
Clare Munro, Head of Energy & Infrastructure, Brodies
“There’s no doubt that the downturn in oil price is of concern and should not be underestimated. However, there are several factors that should reassure us that ultimately our industry will remain in good shape – a $50 oil price is unsustainable for most oil-exporting countries in the long term; the government has considerable scope to assist the industry by reducing the current 60-80% oil & gas tax rate; much of our service sector is not wholly dependent on the UKCS because it now exports globally; and the industry, having been through such cycles before, has learnt valuable lessons that have made us more robust.”
David Rennie, international sector head of oil and gas at Scottish Enterprise
“This is obviously a difficult time and we are already beginning to see the impact of the falling oil price on Scotland’s sector and the north east.
“While current circumstances are challenging, we also need to remember that this is a resilient industry and one which is used to volatile prices – it has been here before and is used to change and challenge.
“So while we need to ensure that the industry is given all the support necessary, such as through the Energy Task Force announced this week, we need to keep an eye on the long-term and remember that the Scottish oil and gas supply chain is a truly global player.
“Our annual survey of Scottish Oil and Gas Supply Chain sales published last May showed that international sales, with a value of £10billion, accounted for just over 50% of the overall total figure; in 2001 that international share of the total was 31%.
“And while of course the fall in price will impact globally, our diverse and world renowned supply chain will continue to be in demand across the globe as we’ve seen this week with a number of contracts at home and overseas being awarded to Scottish firms.
“In times like this it’s even more important to promote our supply chain especially those companies who can assist in reducing costs and improving efficiency which are key right now.”
Ian Phillips, chief executive of OGIC
“The North Sea is the most expensive place in the world to produce oil – fine when oil price is north of $100 per barrel – but pain is inevitable when the price is below $50.
“Average lifting cost in the North Sea is below $30 per barrel – so the UKCS is not dead.
“However the average conceals some fields with lifting costs of $80-$90 per barrel. Those field owners will be hurting and there is the serious prospect of earlier-than-previously-expected decommissioning.
“This creates huge opportunities for some in the decommissioning supply chain.”
Derek Leith, UK head of oil and gas taxation at EY
“As oil and gas companies adjust to much lower oil prices there is still scope for the creation of considerable value through innovation, collaboration and a measure of consolidation within the sector.
“It is harsh medicine, but it could be what is required to galvanise industry, the new regulator and Treasury to adopt the proposals set out in the Wood report.
“Hopefully it will also result in a rapid shift in the UK oil and gas fiscal regime away from a primary focus on production taxes to a lower tax regime that helps to stimulate investment and focus on the macro economic benefits of the industry to the UK.”