Oil & Gas UK warns of 'increasingly grim' North Sea outlook, urges more support

Industry group Oil & Gas UK warned Tuesday of an "increasingly grim" outlook for the North Sea sector and called for a system of government backing for those willing to invest in the country's "increasingly fragile" supply chain.

Following a survey of its members, Oil & Gas UK said two-thirds of UK upstream oil and gas companies expected lower oil and gas production in 2020 than previously anticipated due to collapsing oil and gas prices and the coronavirus pandemic, and a quarter of upstream companies acknowledged being financially "challenged."

OGUK also revised down its investment expectations, estimating upstream capital expenditure would total GBP3.5 billion-GBP4 billion ($4.4 billion-$5 billion) this year, roughly a third below last year's levels, and said it expected only a small number of new developments to move forward to approval.

Dated Brent benchmark oil prices hit 21-year lows of around $13/b last week, while the industry has been battling novel coronavirus outbreaks at remote offshore facilities.

Reflecting particular concern about the supply chain and drilling sector, OGUK said drilling activity was running at half last year's levels, with 24 wells initiated so far this year, of which 23 were development wells. On Monday, a group of trade unions said some 25 mobile drilling units were currently "stacked" inactive off the Scottish coast.

OGUK called for the creation of an additional support mechanism by which the government would provide backing for investors in supply chain companies, either in the form of guarantees or through a state-owned "bad bank" focused on risky assets, of the type created in the global financial crisis.

Trade unions have gone further in the direction of calling for nationalization, with a call by unions Monday for the government to take stakes in upstream projects, something the industry has been reluctant to contemplate.

Energy transition role

OGUK chief executive Deirdre Michie said that "with the right support this industry can still have a strong future," and went on to argue the industry had a role to play in the UK's transition to a low-carbon economy through activities such as carbon capture and storage.

"Over recent years we have responded to difficult challenges to re-establish ourselves as a globally competitive basin," she said. "Without dodging the scale of challenge, we must step up again and use this as an opportunity to renew the UK's commitment to a just, inclusive and sustainable transition."

OGUK has welcomed the various government support measures already created for UK industry, including a "furlough" scheme designed to pay temporarily inactive workers, although it reiterated Tuesday it wants a loosening of credit rating requirements under a "Covid Corporate Financing Facility."

It estimated that oil and gas projects currently awaiting approval in UK waters amount to 2.5 billion barrels of oil equivalent, with more than half these projects able to break even at $30/b oil prices, or 20 p/th gas. But it said the "vast majority ... are very marginal at these prices and intense capital rationing will mean it is even harder for most projects to secure investment."