Drop In Oil Industry Confidence

11 June 2015, 08:06

Two-thirds of North Sea oil and gas industry operators have been forced to cancel projects because of the recent fall in oil price, according to a survey.

Confidence was found to be at an "all-time'' low in the sector and activity levels were down in line with the declining oil price.

An increase in decommissioning was described as "a bittersweet positive'', with more than 80% of contractors involved in that work seeing increases in their activity in the last 12 months.

The report published today revealed contractors' confidence in the UK Continental Shelf (UKCS) is at its lowest point since the survey began in 2004, with only 7% saying they are more confident about their activities there than they were a year ago, compared to 76% who are less confident.

The percentage of firms that reported working at or above optimum levels in the UKCS has also fallen to its lowest level since the survey began.

The findings are contained in the 22nd Oil and Gas Survey conducted by Aberdeen and Grampian Chamber of Commerce (AGCC) in partnership with law firm Bond Dickinson.

It was revealed that 70% of all firms involved in exploration reported seeing its value fall in the past 12 months, with just 8% of them expecting the value of exploration to increase in the coming year.

One respondent warned that although measures in the March Budget were welcome, further stimulus to exploration and investment was needed.

James Bream, research and policy director at AGCC, said: "Once again we have a set of results that give us clear signals that new opportunities exist and tells us that actually - contrary to what people say - we haven't been here before.

"Confidence levels are at an all-time low and we are now experiencing our first 'recession of confidence', and it looks gloomy in the year ahead too.

"However, we have seen positive tax changes, the OGA (Oil and Gas Authority) team is bedding in and in the Queen's Speech the new UK Government has committed to legislating for the Infrastructure Bill.

"There is lots to build on and just perhaps it is possible that we are seeing the start of the next phase in our role at the frontier of the oil and gas sector.

"Can we grasp the opportunity to lead the way in decommissioning practices and become a new high efficiency basin as we mature faster than others? This is a mid-life crisis in the UKCS but, as some people say, life begins at 50.''

Tax issues were cited by 81% of contractors as a constraint on their activity in the UKCS - an increase from 28% in the last survey.

Uisdean Vass, oil and gas partner at Bond Dickinson, said: "The UK oil and gas sector is going through a regulatory and fiscal transition at blistering pace and, with a new regulatory authority in the OGA, companies in the sector are understandably increasingly concerned about how they will be affected.''

He added: "Decommissioning is the bittersweet positive in the survey. Academics have been predicting an imminent spike in decommissioning for years but that spike is now well and truly upon us.

"Decommissioning is not driven by oil price or demand and could be very important in maintaining the value of activity in the North Sea - but the inevitable downside is that it hastens the decline of offshore exploration and production.

"There are other opportunities for companies in the sector. It has never been more important for contractors to focus on technology improvements and internationalisation, and in world terms there are new opportunities in unconventionals and in new jurisdictions such as Mexico, which has signed a memorandum of understanding on collaboration in the energy sector.''

The survey approached 700 operator, contractor and service companies in March and April. It asked about the consequence of the falling oil price on the behaviour of companies, with two-thirds of operators, and one-third of contractors, selecting the "cancel projects'' option.

It was not asked if these projects were in the UKCS itself or in other markets.

The second most common consequence for operators was reduced staff training.

Scottish Labour's finance spokeswoman Jackie Baillie said: "Whilst the recent oil price has been good for the economy overall, it has been a disaster for firms and families in the north east of Scotland.

"We need to do everything we can to make sure that the opportunities that are available through decommissioning are maximised to their full potential.

"The collapsing oil price also shows exactly why the SNP's plan to cut Scotland off from UK-wide taxes and scrap the Barnett formula would be a disaster.

"Under the SNP's plan for full fiscal autonomy we would be over-reliant on falling oil revenues. That would mean cuts worth £7.6 billion to our schools and hospitals in Scotland. No wonder the SNP are now trying to run away from their own plan.''

A Scottish Government spokeswoman said: "As this new report highlights, whilst the changes brought in the recent budget were welcome, they have not gone far enough to support the industry.

"In particular we note that survey respondents have highlighted the need to increase exploration drilling. We were disappointed that the changes announced by the Chancellor in his recent budget did not include the exploration credit which we proposed and which is clearly needed, however the forthcoming budget provides another opportunity for the UK Government to take the necessary action to support exploration.

"The mood of the industry as captured in this survey must highlight the need for the Treasury to take further action.

"The Scottish Government has responded to the needs of the current downturn through the successful work of our Energy Jobs taskforce, which includes support for those workers who have faced or are facing redundancy. However it is up to the UK Government to ensure that the correct taxation and regulation policies are in place to give the sector the support it needs.''