Complex changes for North Sea as oil price plummets

The North Sea is facing a potential economic triple-whammy and may need to make “complex and difficult” changes in light of the plummeting price of oil, a new report has warned.

The sector is in a “painful situation” as a result of low oil prices being “sustained for longer than anticipated”, the PwC report said.

The authors warned that continued falling prices could lead to less investment, culminating in accelerated decommissioning at oil fields.

The report argued there could still be long-term opportunities for the UK’s oil and gas industry, but added that companies would need to “transform the way they operate to meet the challenge”.

Brian Campbell, oil and gas capital projects director at PwC and co-author of the report, said: “The stark reality is that firms need to be able to operate in an environment where oil averages at $50 (US) per barrel - only then can it be truly fit for the future.

“We’ve been talking about cost reduction and restructuring within the industry for several years now and the harsh truth is that if many larger exploration and production and oil field services firms had implemented programmes before the oil price crisis hit, then the industry would be in a much better place to weather the storm that is currently raging.

“But it’s not too late to glean some good out of adversity and for businesses to work together to create their own new dawn for the North Sea.”

With energy companies looking to cut costs in the wake of lower prices per barrel, firms have been considering measures such as staff numbers, along with renegotiating rates with contractors and oil services providers, the report said.

Companies must answer “hard questions” about whether they can continue to invest in the sector, or if they should instead “move on”.

But the report stressed the need for the industry to take a long-term view, adding that “intelligent and strategic cost-cutting” could “position players well through this turmoil”.

Mr Campbell said: “With economists predicting low oil prices throughout 2015, UK oil and gas firms are not out of the woods by any means.

“They are still at risk of an economic triple-whammy - as the falling oil price reduces income, incremental investment may no longer be economic, with a risk that field life diminishes and decommissioning is accelerated.”

The report said the current circumstances are “the time to transform the industry into a leaner, more efficient place to work and do business, which will minimise the impact of future dips”.

It added: “There will be quick wins that will help businesses through the next few months, but critically other changes that will make companies more efficient and profitable in the future will be essential.

“Hard questions will need to be answered with challenging consequences, but in our view, for many, this is the start of a journey, not the end.”

PwC is advising oil firms to consider re-evaluating the shape of their business and develop a revised business model and strategy, as well as turning to new technology and innovation to meet changing needs in the North Sea.

“There are long-term opportunities for the industry and businesses,” the report insisted.

“Many businesses will need to transform the way they operate to meet the challenge.

“These transformations will be complex and difficult but should start with reviewing the vision of what the future shape of the company should be, so that the changes can then be viewed in this light. Only then will we get away from the short-term knee-jerk reactions that will damage the industry in the future.”

It added: “We are under no illusion of how hard this is going to be but believe that there are opportunities from the current adversity.”

Kevin Reynard, office senior partner at PwC in Aberdeen, said: “Viewing lower oil prices as a catalyst for driving change may not be a bad starting point, particularly if we look for the opportunities in the current adversity for operators in the North Sea and further afield.

“Firms could start by defining the future shape of the company and what needs to be transformed to get there.

“We recognise this may be a much more complex and challenging path. But only by approaching transformation from that vision can we escape short-term knee-jerk reactions that could wipe out knowledge banks and turn off suppliers, for example, actions which could ultimately damage future business growth and the viability of the wider industry.”