The four pillars supporting North Sea Oil & Gas in 2013

Monday, January 28, 2013

With the UK government's issuing of 167 new oil and gas licences to companies looking to drill in the North Sea attracting 224 applications, the industry is set to experience a period of renewed activity in 2013. Tax allowances also appear to be playing a part in unlocking billions of pounds of investment in mature fields, creating an expectation of increased business for many suppliers to the oil and gas sector in 2013 and beyond.

According to Oil and Gas UK, 24bn barrels of oil remain to be extracted from the North Sea.

However, this promising stimulus to the industry may not only extend the productive economic life of North Sea fields once thought past their prime, but may also create a surge in demand for equipment and labour resources that are already in short supply. There are four key points to consider for 2013:

1. The balance of taxation

Production of oil and gas from the UK's continental shelf has been in decline for a number of years, but its enormous contribution to the UK economy is expected to continue for many more years to come - that is, provided investment is not hindered by over taxation. The recent announcement by the government to create tax allowances for mature fields is merely redressing the negative impact of the Treasury's earlier hike in marginal tax rates for companies operating in the North Sea - which in some cases were as high as 81 per cent. Figures from Oil and Gas UK indicate that the industry paid £11.2 billion in corporate taxes on production in 2011-12, almost 25 per cent of total corporation taxes received by the Exchequer. Hopefully, the government's decision to introduce allowances will tip the balance and spark a renewed vigour in the industry for investing in mature fields.

2. Creating equipment availability

As a mature industry, North Sea oil and gas fields are getting smaller and costs per barrel are rising. To stay competitive in a volatile global energy market, operators are going to have to keep costs as low as possible. However, availability of specialist mobile equipment such as drilling rigs, pipe laying vessels and heavy lift barges are in demand the world over - so there may be longer-term contracts on offer in other parts of the world that are more attractive. Once such heavy and slow moving pieces of kit have transferred to other areas of the globe, getting them back again is not so easy.

Given the long lead-times involved in building a new drilling rig, planning and investment has to be geared to a long-term vision - something that may be difficult to achieve with mature fields and volatile oil and gas markets. With aging infrastructure supporting extraction, costs of maintenance will continue to rise. Clearly, a new way of thinking will be required to cost-effectively extend the life of equipment.

In 2013 operators will need to look towards greater collaboration on sharing drilling rigs and other assets, perhaps creating collaborative arrangements between two or three competitors. We may well see creative initiatives of this nature on the rise next year and in the years to come.

3. An emphasis on Labour resources

The North Sea region is short of good, experienced oil and gas people and this will be an ongoing problem in 2013. The shortage of labour resources may well act as a constraint on the renewed interest in exploiting mature fields. Although experience is always in high demand, there is also a need to encourage young people into the industry. More apprenticeships will be called for next year as operators and suppliers respond to the expected increase in investment to the sector. The demand for high calibre engineering graduates is very strong, particularly in the burgeoning subsea industry in which the UK has renowned expertise. But perception of the industry also needs to change - moving away from an industry associated with wild swings in demand that in the past have lead to volatile jobs markets. As an industry that has a reputation for paying reasonably well, when compared to other sectors, 2013 should be a year for encouraging the young to engage with the industry through exciting apprenticeship and career opportunities.

4. Developing greater collaboration

The North Sea oil and gas industry has a cultural history of collaboration, born from the unique challenges of the harsh environment, the pioneering technology and demands of deep-sea drilling. Initiatives on Health & Safety, sharing of resources such as helicopters, and CRINE - the cost reduction initiative for the New Era - have proved that collaboration works in the industry, creating value by sharing resources and costs. Collaborative communities will be the way forward in 2013 as the industry identifies the clear advantages from sharing resources - such as rigs and vessels - and work towards creating closer relationships with suppliers and competitors alike.

Provided the balance of tax is set to stimulate investment, rather than retard it, and initiatives to attract the best young talent to join the industry are followed through, then 2013 should see an encouraging level of activity that is good for the industry, the UK economy and consumers. However, maintaining profits will be dependent on keeping costs under tight control and that will require greater collaboration across the industry, so that assets can be retained in the region and their use maximised. Sharing costs creates value.

Contribution by
from Achilles

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. More

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