North Sea oil and gas producers curbing output 'a bit,' but not for price reasons: OGUK

London — UK North Sea oil and gas producers are tending to dial back production slightly to avoid straining systems at a time of minimal offshore staffing, but not due to the collapse in oil prices in recent days, Mike Tholen, upstream policy director of industry group Oil & Gas UK, said Thursday.

In a briefing with journalists, Tholen said any shortfall in production in recent weeks was not a response to the price plunge, which has seen North Sea crude hit 21-year lows in recent days, but to do with the practicalities of guarding against coronavirus.

North Sea crude oil loadings, for example of the Forties crude blend, have reportedly suffered a number of delays in recent weeks.

Tholen, however, played down the likelihood of producers curbing production as an immediate response to collapsing prices, saying a numbers of factors would deter this.

Many mid-sized and smaller producers are cushioned by hedging strategies extending for as much as two years or longer, he said.

In addition, unless a company intends to permanently decommission a field, the process of restarting production after a period could be costly and technically complex, he noted.

Tholen estimated North Sea oil and gas production volumes might currently be reduced by as much as 8% due to an industry-wide switch to minimal staffing, aimed at protecting workers from COVID-19. But he added this was a rough estimate based on incomplete information.

UK oil production was around 1.1 million b/d last year. Producers have been grappling with a number of outbreaks of coronavirus at offshore facilities, and switched to the minimal workforce regime a month ago. However, OGUK said no fields are currently shut due to coronavirus among workers.

"Production on a number of platforms has been turned back a bit. That sounds to me more because of operational resources -- where you don't want to push the plant too hard when you've only got a skeleton crew on the facility -- rather than a desire to limit supply because the market won't take production you've got," Tholen said, adding there were "no signs" of operators curbing production due to low prices.

"Typically, companies will be reluctant to turn off facilities. The costs incurred to restart are also considerable. Keeping stable operations through the downturn, maybe [dialling] back slightly as much for operational reasons as anything else, seems to be where we're at," Tholen added.

Hedging strategies

Dated Brent, the benchmark for North Sea crude production, was priced at $13.24/b on April 21, the lowest since March 18, 1999.

Tholen estimated that small and mid-sized companies would typically have hedged half to two-thirds of their expected oil and gas production this year, and 40-50% of next year's production.

Hedging "doesn't keep you away from the heat of the low oil price, but it softens the blow as you're trying to manage the business," he said.

"The immediate day price of oil is only part of the story on what oil price income receipts are for companies. If we were to see oil prices sustained at $10/b for a number of months, that would be one thing versus seeing huge volatility, some of which is on the low side, having short term consequences."

On the longer-term viability of the UK North Sea industry, Tholen reiterated OGUK's previous guidance, saying three-quarters of UK oil and gas fields could generate positive cash flow at oil prices of $30/b, and added that, "somewhere between $30-40, the whole basin washes much of its face."