Opinion: North Sea efficiency drive must be ‘stepped up’

A year ago, I likened the dynamic of the oil and gas industry to the migration of elephants. You couldn’t see them, but you could hear the sound of the herd approaching. They might not yet have made it to our back garden, but they are getting closer.  As 2017 comes to a close, the outlook for North Sea oil and gas remains mixed,  but I am cautiously confident about 2018.

Some commentators are understandably pessimistic after several tough years (this is Aberdeen after all!); others are perhaps over-optimistic after the oil price rise and new discovery by Statoil in the Moray Firth of a field which could hold 130 million barrels.

I am somewhere in the middle. 2018 will be dominated by Brexit, but this is one industry unlikely to feel a material direct negative impact. Oil and gas has diversified in terms of both geography and focus; 2017 was characterised by increasing work with clients beyond the North Sea, in the US, Canada and across Africa.

Optimism has been fuelled, quite rightly, by the stabilising commodity price and good relationships between the Treasury and industry, with welcome tax incentives in the budget. In addition, the Oil and Gas Authority (OGA) has become a more effective regulator and the general climate for investment is improving – with indications that capex commitments are being reviewed in a positive light and new investments being made.

We are living through a time of great technological change and Aberdeen is well-placed with the Oil & Gas Technology Centre working to bring the best global innovations to bear on specific technical challenges. This has the potential to not just make a material change to the cost of the recovery in the North Sea, but to set a platform for North East companies to further their reputation as world leaders in oil and gas and offshore energy.

Having said that, challenges remain, both for the industry as a whole and North Sea in particular. There is tough international competition for investment and the North Sea is, for now, still perceived as being relatively expensive and highly regulated.

Despite the positive announcement by Statoil in October, North Sea exploration is still low.  This must improve quickly if the estimated large levels of still-untapped reserves have a chance of coming on stream in future.

There also must be greater incentives for operators and exploration & production businesses to either invest in or divest North Sea assets. The OGA will have a significant role to play in this area.

Another positive sign is a higher level of tendering and enquiry activity in parts of the service sector, which looks likely to kick in strongly from February or March. However, this optimism comes with a caveat; rates remain challenging, with many companies finding they are expected to tender at levels that are not economic for their business.

This means the continued drive for business efficiency, all along the North Sea oil and gas supply chain, must be stepped up. This was a key theme in Sir Ian Wood’s interview at the Oil and Gas UK AGM, as he called for continued behavioural change to adapt to the new normal and for greater “proactive collaboration”.

Businesses already share and incentivise best health and safety practice as the highest priority for the industry. That same mindset must be developed and applied to ensure the continued generation of efficiencies, not just for individual businesses, but across the entire industry, to the benefit of all. Technology has a significant part to play.

The oil and gas industry must grasp this collaborative nettle, supported by the OGA and the OGTC, to ensure the North Sea is seen as an attractive investment opportunity in 2018. Creating investor confidence is crucial to delivering positive signs of recovery, although it will take time for this to feed through the entire supply chain.

Let’s be confident, but cautiously so. There is much work to be done. And let’s clear a path for these elephants preparing them a healthy diet of vegetation – rather than iced buns!

Philip Rodney is Chairman of legal firm Burness Paull

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