The price of a barrel of oil is more important to the health and performance of North Sea firms than either Brexit or another Scottish independence referendum, an audience in Aberdeen heard yesterday.
Speaking at the Press and Journal Morning Briefing, in association with Turcan Connell, Derek Leith, partner with EY, said oil and gas sector companies tended to be more concerned by the impact on their business of the oil price but that, in terms of Brexit, the main worry was about employing EU workers.
He said: “One theme that is very clear is the status of EU nationals. As a country we want to be able to have the most talented people at our disposal so we don’t want to have any clarity on that would be enormously helpful.
“Then when we turn to ‘indryref2’, the oil industry has always had to deal with considerable uncertainty. There are very few businesses I know of who can trade a product that can go from $110 to $29 a unit price and recover up to $50.
“Most businesses I know wouldn’t survive with that level of volatility, but oil and gas sector has managed to cope with it.
“So I suspect there isn’t anything from a regulatory change perspective that industry won’t be able to cope with. Provided it focuses on the things it can influence. In this sector in the UK we need to stay competitive to attract capital investment.
“To do that we need to be at the forefront of technology development and at the forefront of cost reduction and efficiency.”
He said that there were signs of confidence returning to the industry. “As we come into 2017, there are clearly some signs the oil price has stabilised and some confidence is returning to the sector so we have cause for cautious optimism.
“I think we have turned the corner. Albeit I was unhappy to see the oil price begin to slide again. But I still think we are likely to be in a $50-$60 oil price range.”
But a modest recovery in oil price would not necessarily trickle down the supply chain.
“For some elements of the supply chain this might be the most difficult year yet,” he said.
“When the price started to fall in 2014, many of these companies had backlog that saw them someway through 2015/16. In 2017 they have made all the cuts they can make and that backlog is gone.”
The theme of the event was: “opportunity or tough times ahead?” and also featured Martin Gilbert, chief executive of Aberdeen Asset Management; Aberdeen South MP Callum McCaig, the SNP’s energy spokesman at Westminster; and Alexander Garden, partner and head of tax at Turcan Connell. Rita Brown, editor of Energy Voice chaired the panel. The key note speaker was Lord Dunlop, Scotland Office minister.
Lord Dunlop said: “I recognise the industry has been going through a very tough time.
“Low and volatile oil price has put strain on the sector.
“But the resilience and ingenuity that the industry showed in the early pioneering days of developing one of the most challenging basins in the world and turned that into a fantastic success story, that same resilience and ingenuity is also seeing the sector through these difficult times.”
He said the sector’s ability to withstand the downturn was due a “joint effort” between the industry and government.
“The industry has done a huge amount to help itself. Average unit operating costs have been halved. Obviously the government has had a part to play as well with a £2.3billion fiscal package of support,” he said.
“I was very pleased that in the last budget the chancellor set up an expert group to look at how we can assist and stimulate late life production.
“Talking to players in the industry, the sense on gets is we are at a point now where the operators are not losing money to the extent they were, although the supply chain is still under pressure.
“But there are encouraging signs. The $4billion worth asset and corporate deals we have seen in the early months of 2017, and the news last week that Hurricane Energy have a find west of Shetland – we look forward to seeing what that turns into.
“There are grounds for cautious optimism that we will see more investment coming through in the industry.”
Mr Gilbert said he was even more cheerful about the North Sea’s potential as an attractive investment location and for the oil price.
He said: “We have to remember that only two of the top 10 oil producers in the world are democracies – so it always pays for the oil companies to have a balanced portfolio. That is one benefit we do have here in Aberdeen.”
Saudi Arabia, Opec’s largest producing member, is also motivated to try to drive up oil prices, he said.
Saudi is continuing to lead on production cuts after cartel members agreed to curb output this year.
Mr Gilbert said: “The Saudis in particular have drawn back from their sovereign wealth fund.
“The Saudis had about $500billion – they are burning through about $1billion of that a year fighting two wars, one in Yemen, and the costs of running their country.
“No one has more incentive to get this oil price up than these big oil producers in the Middle East especially the Saudis.
“I’m positive on the oil price going back up actually.”
Alexander Garden, partner, Turcan Connell, highlighted the imminent arrival of differentiated income tax rates coming into force in Scotland on 6 April which would have implications for oil companies that employed residents of England.
“What we are going to have is a different higher rate threshold in Scotland. In the north-east we have to identify who Scottish tax payers are,” he said.
“Businesses need to be able to cope with accounting for them through their payroll slightly differently so there is an extra layer of complexity there.
“It is another factor businesses will have take into consideration.”
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