UK North Sea industry warns of long-term damage without government help

London — Industry group Oil & Gas UK called for help from the British government Thursday to deal with an "increasingly fragile outlook" for the North Sea energy sector, saying it could expect negative cash flows this year and Europe's main oil and gas basin needed protecting if it was to survive in the long term.

In an annual outlook document, rewritten in light of the health and economic crisis, OGUK said companies in the UK offshore oil and gas industry were likely to rein in drilling and to slash capital spending by 20-30% this year, to around GBP4 billion-GBP4.5 billion ($4.7 billion-$5.3 billion), leading to job losses and damage to the supply chain.

While the sector is grappling with how to handle suspected coronavirus cases offshore, OGUK said it should be able to maintain production at current levels for one-to-two years, based on current fields and facilities. It noted operating costs had dropped by more than half since 2014, to around $15/barrel of oil equivalent produced.

However, the sector is now facing rock-bottom oil and gas prices. In order for it to survive and continue to invest in new resources it will need help from the government's GBP350 billion ($413 billion) economic stimulus package, unveiled on Tuesday, OGUK said. The trade association said it was seeking meetings with government ministers to discuss a potential "COVID-19 Sectoral Resilience Package."

"All exploration and production companies will take action to preserve cash. We will see all investment and expenditure likely being re-evaluated. We expect to see activity delays, deferrals and in some cases even cancellations," OGUK market intelligence manager Ross Dornan said.

However, "lower investment and activity levels now is likely to compromise our ability to effectively manage output in the coming years. What is vital is that our UK industrial capabilities are protected, [and] our industry is a core part of that," he told journalists in a phone briefing.

"We need to make sure companies are able to protect their capabilities, to maintain workforce levels as much as possible. It's crucial from a security of supply perspective," Dornan added.

"We need government support along with other industries now, to protect businesses, jobs and capabilities. We need to see a resilience package," he said, adding the details would be worked out in the coming days.

Despite energy transition efforts, oil and gas still account for 75% of the UK's energy needs. The UK oil and gas industry, which emerged in the 1960s and 1970s, still meets more than half of the country's gas demand and nearly three quarters of its oil product demand, OGUK estimates. Although energy supply is growing more diverse, the UK will need oil and gas for decades to come, and the industry can play a role in technologies such as carbon capture and storage, it said.

Contingency planning

While OGUK is focused on ensuring the industry's long-term survival, a further deterioration of the current health and economic crisis could spark nearer term supply issues, Dornan said.

Asked if the industry needed a more coordinated approach to ensuring supply across diverse fields and facilities, he said near-term supply was also being discussed with the sector's regulator, the Oil & Gas Authority, and the government's Department for Business, Energy and Industrial Strategy. The UK currently produces around 1.1 million b/d of oil, while nearby Norway produces around 2 million b/d, accounting for over 3% of global supply.

"There's enough hooked up, sanctioned resource right now to maintain production levels at around the current rates in the next year to 24 months. If the situation does develop further, security of supply will become an increasing focus," he said.

"We'll work closely with the government, regulator, partners to make sure that we're able to maintain a secure energy supply to the UK. But the focus very much right now is ... to make sure that the industry is as resilient as possible," he said.