In response to the release of the Oil & Gas UK 2016 Economic Report, Mark Andrews, UK Head of Oil & Gas at KPMG comments.
In response to the release of the Oil & Gas UK 2016 Economic Report, Mark Andrews, UK Head of Oil & Gas at KPMG comments:
"With oil prices continuing to hover below $50 a barrel, the release today of Oil & Gas UK’s 2016 Economic Report, has served to remind us of the significant challenges currently facing the UK North Sea. Whilst not unexpected, the confirmation that 2016 will be the basin’s fourth consecutive year of free cash-flow deficit, underlines the major financing issues facing many companies.
“Prices are unlikely to bounce back to $100 in the short-term, and with supply and demand dynamics unchanged, we expect this to lead to a period of increased deal activity, as the stronger and better capitalised organisations seek to obtain assets at historically low valuations. Whilst there has been plenty of deal discussion between parties, the number of deals completing has been low.
“The deals that have been done are generally involving more innovative deal structures, which have helped to close the gap between buyers and sellers expectations. If the targeted 10-20 billion barrel reserves, estimated by Oil & Gas UK, are to be recovered from the North Sea basin, it is critical that deals happen to transfer assets into the control of those with the expertise to exploit the remaining reserves.
“It’s not all doom and gloom though. The news of a continued decline in average operating costs per barrel highlights the progress that has been made to reduce costs and increase efficiency. The ongoing move towards greater collaboration between operators is allowing organisations to reassess their operating model, and in many cases this will also be a source of added efficiencies.
“Decommissioning activity continues to accelerate, both in terms of number of fields and expenditures. This trend will only continue, with this becoming an increasingly important activity across the basin. All stakeholders in the basin are currently looking at the decommissioning challenge and grappling with the best approach. There are likely to be significant economies of scale available once decommissioning activities reach a suitable size, particularly in the context of hub-based activity. Those organisations that are able to move quickly around organisation and structure will be able to obtain these benefits first, which may provide a significant competitive advantage in the longer term."
Alan, Kennedy, Head of Oil Field Services in Aberdeen, adds:
“The Oil & Gas UK 2016 Economic Report provides affirmation of what industry knows: times are hard and will continue to be so. That said, the upstream industry is now better placed to address the challenges and opportunities in the UK Continental Shelf (UKCS) through the cost reductions and efficiencies that have been achieved to date. This is work in progress for the operator and oilfield services communities, and unfortunately the fallout from this process continues in terms of job losses and corporate failures.
“Progress on addressing key technology challenges in the basin is also being made, giving some cause for optimism in relation to the maximising economic recovery agenda. The Oil & Gas Authority has published its technology strategy and the new Oil & Gas Technology Centre (OGTC) has moved from concept to mobilisation this year, pending final confirmation of its anticipated £180m of funding from Westminster and Holyrood. The latter – based on a model successfully deployed in other major industries – has the potential to transform the UK industry’s technology landscape to improve exploration, production and decommissioning outcomes in the basin, support the supply chain in delivering exportable technology and to establish Aberdeen as a global centre for mature basin innovation. The priorities have been set by industry but what has been lacking is a mechanism for delivering the technology solutions. Hopefully the OGTC – bringing together operators, the supply chain, the regulator and the R&D capabilities of UK plc – will make the critical difference. Locally, it will also have an important part to play in the hoped for transition of Aberdeen from a global operations centre to a technology hub, which in turn will anchor the supply chain and its high value jobs here for the long term.”
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