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Political uncertainty for North Sea oil and gas industry

Hydrocarbon Engineering,


Almost half of firms in the oil and gas sector (45%) say the Scottish referendum is impacting their plans and investment proposals, up from 38% last spring, according to a new report published today.

The findings, from the 20th Oil and Gas Survey, conducted by Aberdeen & Grampian Chamber of Commerce and sponsored by law firm Bond Dickinson, reveal that oil and gas firms are more confident about their future prospects on the UK Continental Shelf (UKCS) than they were a year ago.

However, the industry, which holds a central position in the economic debate on the Scottish and UK economy, is facing a number of key challenges and the study highlights a great deal of uncertainty about how the sector will be affected by major political events.

Independence

Views on Scottish independence are split, with 38% of respondents saying a vote in favour of independence would make little difference to the sector, 18% saying it would be positive, and 12% saying it would be negative. The feeling of uncertainty is underlined by the remaining one in three firms who feel it is difficult to reach a clear view at this stage, with one respondent explaining that “With no side giving any clear answers as to how they will help the UKCS it is difficult to see how Scotland would benefit either way.”

Wood Review

Critical to the future of the UK oil and gas industry is the implementation of the Wood Review, the final report of which was published on 24th February this year. While supportive of the recommendations made, respondents to the survey are less confident about how they will be implemented with almost half (48%) saying they are unsure if the Review would lead to a significant change in the way the UKCS operates.

Of the specific recommendations made, oil and gas firms are most confident that revision of the fiscal regime will be effectively implemented, with almost two thirds (61%) believing it would be. Fifty eight% of respondents believe that the creation of a new regulatory body will be effectively implemented, followed by the creation of readily available geological data (54%); the development of a new strategy (53%); improved collaboration within the industry (51%); and the industry working with the regulator and sharing infrastructure (43%).

Uisdean Vass, oil and gas partner at Bond Dickinson, said: “With the referendum on Scottish independence less than four months away, the uncertainty arising from the actual referendum process has caused more angst amongst oil and gas companies than the prospect of an actual ‘Yes’ vote.

“Rising costs, falling (though stabilising) production and a lack of exploratory drilling are the dark clouds over the North Sea. However, the Wood Review, in spite of the challenging nature of some of its goals, could provide a platform to positively revolutionise the province. These proposals, if implemented, have the potential to rival independence itself in importance, and we are constantly being asked by clients to advise on their potential implications for businesses.”

Activity levels and business confidence

The report paints a mixed picture for the industry. Just 52% of contractors are working at or above optimum levels on the UKCS, the lowest level since late 2011, with this problem being felt most acutely by smaller contractors.

There has been a sharp fall in the percentage of contractors working at or above optimum levels in international markets, with just 47% doing so – down from 73% in the previous survey. This reflects increasing competition in the international market.

However, 37% of oil and gas firms are more confident about their future prospects on the UKCS than they were a year ago, compared to just 15% who are less confident, a net positive balance of 22%. A net positive balance of 43% of respondents are more confident about their business activity in international markets.

Trends in investment

Confidence is further evidenced by the 35% of respondents who report an upward trend in investment in the UKCS over the past 12 months. Development of new markets is the most popular area of investment expenditure, with 48% of respondents reporting an increase in investment in this area over the past year. This is followed by staff training (47%) and research and development (33%).

Half of firms (49%) are scheduling an increase in investment spend over the next two years, with the most common focuses of investment being new markets (61% of these), staff training (49% of these) and research and development (36% of these).

Constraints on UKCS activity

Tax relief and capital allowances are the most frequently cited key constraints to UK oil and gas businesses, cited as ‘very important’ by 56% of respondents, though this is more important for contractors than operators.

This is followed by skills shortages (cited as ‘very important’ by 49%), the economic climate (40%) and the loss of staff to other companies (37%).

Robert Collier, chief executive at Aberdeen & Grampian Chamber of Commerce, said: “The UK oil and gas sector faces a challenging time but the industry is responding well, with many increasing investment spend in the UKCS and overseas. North-east Scotland is pivotal to the Scottish and UK economy and it is vital that the oil and gas industries here are supported so they can maintain their impressive growth record. The effective implementation of the Wood Review would be a positive step in the right direction.

“The shortage of skilled labour and loss of staff to competitors is a key challenge to the sector and it is encouraging that so many companies are increasing their investment in staff training, as well as developing new markets and research and development.”

Results discussed come from the 20th Aberdeen & Grampian Chamber of Commerce Oil and Gas Survey. The survey is independently conducted by the Fraser of Allander Institute. Established in 2004, it questioned over 700 operator, contractor and service companies over a two-month period in March/April 2014.

 Written by Bond Dickinson. Edited for web by Cecilia Rehn.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/10062014/current_political_uncertainty_for_north_sea_oil_and_gas_industry/


 

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