Offshore Europe – Thoughts from the outside looking in

Last week I visited ‘Offshore Europe’, the 3rd largest Oil & Gas event in the world, behind OTC in America and ADIPEC in the Middle East.

Held in Aberdeen every two years it sees 1000+ companies exhibiting to 50,000 visitors over 4 days, their skills, products, services or new technology, specific to their specialism within the Oil/Gas industry.

I have attended many such industry events in my career but this is my first in this fascinating sector, leading to what I think are some though provoking observations:

The upside: Innovation & Optimism

This is a seriously diverse industry with spectacular technological innovation being developed.

Despite press commentary over recent months, to the contrary there is tremendous positivity and longevity for this industry driven by the people leading from the front.

Yes the drop in the oil price resulted in knee jerk reactions, which affected employment numbers, salary levels, supply chain implications & profits and of course tax income to the UK Government.

The artificially manipulated price per barrel latterly at $100+pb had created super profits against capital & operational extraction costs of circa $52pb (2015).

Decades of super profit led to staggering inefficiencies as speed and continuity of extraction took precedent over innovation, efficiency and dare I say it ‘good business practice’. 

For too long there simply was no incentive to innovate, as profit was easy and continual. The lack of competitive stimulation caused the industry to sit back slowly ageing, ambivalent to the threats that were emerging. 

Why mess with a good thing ? This apathy to innovate is not unusual, ask the board-room experts of Blockbuster, Compac, Kodak and Pan Am.

The past is the past, but we what can we or should we do to shape the future?

O&G in 2017

What we are seeing now is a lower $ price per barrel currently: - (Brent Crude USD/bbl $54.01 as 11th Sep 17) which has hit profits across the entire sector from global empires to 3 man SME’s.

However it’s not really about the headline price per barrel any more. It’s actually about the extraction cost per barrel. North Sea (Brent) extraction in 2015 was $52.50pb, in 2016 per-barrel costs stood at $42.47, and by 2016 Q4, costs were down to $41.66pb.

In early 2017 Shell sold its North Sea interests to Chrysaor who have stated they can extract in the North Sea at $26 pb, largely due to implementing innovative technology. 

To put this into perspective and as the following tables shows, if extraction in the North Sea can be achieved at $26pb this brings the cost of North Sea O&G extraction out from a very dark place.

Innovation has arrived and this is pulling down extraction costs and from what I understand, innovation is being driven wholly by supply chain companies who are looking for a competitive edge through efficiencies in extraction methods, technology and in some instances some seriously impressive and indeed sexy innovation. 

Simply put, 'Faster, Cheeper, Better' wins the day.

North Sea Oil success per exploration well drilled in 2015 was the highest for ten years, with an estimated ￡1.35 trillion pound value of oil and gas reserves remaining at todays price of $54pb.

Now assuming that an extraction cost of $26pb is repeatable, this, coupled with the efficiencies new technology in the sector is continually developing will undoubtedly create longevity in the sector as profit yields attract investment which drives exploration and so the cycle begins again ?

The downside: Innovation take up is slow and for good reason.

The reticence of the industry’s main oil extraction companies (ExxonMobil, BP, Shell etc.) to embrace new innovation seems to be one of the key factors stalling the driving of extraction costs down even further.

There is a reluctance to have ‘down time’ to install new equipment even if that equipment is more efficient or will give a better rate of return. And coupled with this, there is a nervousness to embrace new technology and be the first mover. 

Only when new technology is seen to have been used by a rival successfully and benefits fully realized will technology be recognised by others as having then been proven to work. This attitude alone arguably adds 3-7 years to the roll out of new technology.

When you understand how quickly other industries embrace new technology, O&G is still using flint tools in a digital world and doesn't seem to mind!

In Norway there is a law that directs all O&G companies operating in this country. If a supply chain company can demonstrate that their product is better, more efficient, greener, safer or cheaper than their competitor then by law this product must be incorporated in the production cycle. The Norwegian Government state that their job is to protect their people and by forcing innovation on the O&G companies this benefit is created including more tax income and environmental improvements.

The UK Government’s failure to invest and protect our O&G sector is a travesty.

The successive governments of the day have used O&G as a political tool adopting a short term attitude for short term political gain. Initially O&G income was used to sort the chronic balance of payments following WW2. Then it was used as a power lever to become part of OPEC. In the 80’s O&G singularly fueled the boom of the 80’s where the focus of investment in the UK was not the North Sea but London and the South East. Even the UK’s nuclear weapons program was only affordable on the back of O&G tax income and with Corporation Tax on Oil & Gas being the largest single sector payer of this tax in the UK you can see why governments of the day have milked it.

Only now when we look at how other governments have treated this asset, can we see that O&G as an asset, has been badly miss managed.

Worse for the North Sea/Aberdeen region is that O&G tax income is not allocated as a North Sea generated tax due to Oil & Gas companies largely having London based HQ’s, where their accounts are filed. Thus corporation tax, PAYE, VAT etc. are all treated by HRMC as a City of London industry. (This can been argued to perhaps also to be a deliberate manipulation in the face of 40 years of Independence threats).

With politicians blissfully ignorant of where tax income in London actually derives from and journalists being both lazy and politically motivated to not influence the independence conversation, the lack of credit this sector and region gets for its tax contribution to ‘Brand UK’ is shameful and shocking.

Perspective round up

Lets look at some other interesting O&G facts taken from last week’s industry media:

·      In 2013 the ￡4bn Kraken field was the largest industrial investment in the UK and finally came online in June 2017. It will produce as much as 50,000 barrels of oil a day at its peak.

·      In the face of lower oil prices, the industry has reduced unit operating costs by 48 per cent from almost $30 in 2014 to around $16 by the end of 2016.

·      In 2016, just over 330,000 jobs in the UK were delivered through or supported by oil and gas production.

Finally I was taken aback buy a few ‘facts’ given to me by various companies/individuals I spoke to at Offshore Europe:

·     “to date, of all the oil and gas identified in the North Sea only circa 6% has been extracted” 

·     “every single oil field has left more oil behind than has been extracted”

·     “if you lift your head and look around, over 94% of what you see has derivatives of Oil within its production cycle & whilst the world moves towards electric vehicles, the O&G industry has a coupe of centuries left in it yet”

·     “the new fields ‘West of Shetland’ have 3 times as much O&G as the existing fields in the North Sea”

The opportunities and longevity for the O&G sector extend way beyond providing fuel for cars and homes are the outlook is extremely positive. The negatives are borne out of a culture of reticence to change and can be resolved easily.

This 'change' ideally needs to start with Government leading a significant culture shift in the best interests of the North East, the O&G sector, Brand UK and of course Scotland. We all know big corporates don't embrace change easily unless forced to do so at which point change is surprisingly quick.