Oil and gas companies in the UK North Sea are facing an “unprecedented” crisis that threatens some with collapse and will mean sweeping spending cuts this year, according to a bleak report released on Thursday.
OGUK, a trade body for the North Sea operators, said the combination of the oil price war triggered by Russia and Saudi Arabia and pressures on commodity prices from the global spread of coronavirus were creating a situation “we have really never seen before”.
Companies, especially those in the oil and gas supply chain still struggling to recover from the last oil price crash of 2014, were once again facing “severe pressures”, OGUK said in a report on the state of the market that also warned “this sector is now in a paper-thin position”.
Oil and gas explorers and producers are expected to slash their capital investment budgets by up to 30 per cent this year as they grapple with the crisis, which has led to a plunge in oil prices. Brent crude continued its slide on Wednesday to a 17-year low of $27.04 a barrel.
OGUK forecasts that revenues from production across the region could drop to £15bn this year from £24.5bn in 2019 and more than £28bn in 2018 despite output levels remaining relatively stable. It was “feasible” that cash flows could turn negative for only the third time in 40 years, the group said.
Oil and gas-producing regions across the world are feeling the pain from the sharp decline in prices in recent weeks but higher-cost regions, such as the UK North Sea, are expected to suffer particularly acutely.
Analysts have warned that some of the independent oil and gas operators in the UK, which are still carrying large debt burdens from the last crisis, could breach their banking covenants this year.
OGUK has appealed to the British government for assistance, pointing out the region’s role in providing “secure” energy.
“We need government support, along with other industries, now to protect businesses, jobs and capabilities and ensure our industry’s future prosperity,” said Ross Dornan, market intelligence manager at OGUK.
Mr Dornan welcomed a package of measures announced on Tuesday by chancellor Rishi Sunak, which included £330bn of government guarantees so that companies could secure bridging loans to get them through the coronavirus crisis.
But he said oil and gas companies needed to know how they could access additional finance and how quickly it would become available. Longer term, the oil and gas industry would be looking for support via a “sector deal” of the kind that had been struck with other parts of the economy such as renewable energy, Mr Dornan added.
Mr Dornan said he had already heard of situations where “job numbers are being reduced” in the North Sea but warned it was too early to forecast what the full impact of the crisis would be on employment in areas such as Aberdeen.
Neivan Boroujerdi, a North Sea analyst at Wood Mackenzie, said that while the region had weathered many storms in the past, it was now in “uncharted waters”.