Rough waters ahead for UK’s oil industry

Oil & Gas UK’s Business Sentiment Index published today reveals that in the fourth quarter of 2014 optimism in the oil and gas industry fell dramatically, dropping 16 points to -23 points on a -50/+50 scale.

According to the Oil&Gas UK, the downfall continues the downward trend seen over the last seven quarters and the overall index has slumped further into negative territory for the second quarter in a row.

The image above shows that the business sentiment began to decline in mid-2012, before the drop in oil price. This indicates that the market recognised the challenges of operating in a high
cost, mature basin even when oil was above $100 per barrel(bbl). The recent decrease in oil price has further exaggerated these challenges, leading to a sharper decline in sentiment over the last two quarters.

Oonagh Werngren, Oil & Gas UK’s operations director, said:  “Unsurprisingly figures published today reveal serious concerns within the industry in light of the very real problems which face the UK Continental Shelf (UKCS), including rising operational costs and a substantial drop in production efficiency. These existing problems, apparent even when the oil price was above $100 per barrel, have been exacerbated by the recent fall in oil price.”

The trade organization representing oil and gas companies in the UK says that many of the survey respondents expressed a growing concern that the impact of oil price combined with the challenge of operating in a high cost, mature basin will increasingly have a negative effect on future activity levels. A number of companies say they have been reviewing their budgets for 2015 and there are clear signs that capital expenditure across the sector will drop.

Comments from contractor companies, working on UK oil and gas developments where investment is already committed, suggest that the full impact of the oil price is yet to be felt although respondents expressed their concern that future projects could be delayed or cancelled in the current economic climate.

Werngren concluded: “While the UK oil and gas industry faces clear challenges as a result of the basin’s maturity, and more recently the oil price, it is now at a turning point. The positive news is that there is a clear consensus that the industry must accelerate its efforts to address the costs and efficiency of its operations across the UK. Alongside this, urgent government action on fiscal and regulatory reform is essential to help secure the next phase of development in the North Sea.”