Can the North Sea survive the price rout?

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The North Sea has weathered several storms in its 50-year existence. But the events of the past few weeks mean the sector is entering uncharted waters. The coronavirus pandemic and collapse in OPEC+ production restraint has seen Brent reach its lowest point since 2003.

Neivan Boroujerdi, principal analyst in Wood Mackenzie’s North Sea upstream team, said: “In the short-term, the North Sea can survive.

“Cost reductions achieved during the last downturn mean 95% of onstream production is ‘in the money’ at US$30/bbl.

“But close to a quarter of fields will run at a loss in this price environment. The major concern here is not volumes. Early shut-ins would accelerate US$20 billion in decommissioning spend.”

What levers can the industry pull to ensure a sustainable future? The quickest win is to reduce operational expenditure, Boroujerdi said.

But longer term, investment is required increase production and reduce unit costs. If the industry goes into harvest mode, a premature end is inevitable.

He added: “Most FIDs for 2020 are off the table. At current prices, nearly two-thirds of development spend could be wiped from our forecast over the next five years.

“Annual investment in the UK could fall below US$1 billion as early as 2024. The threat of stranded assets is real – we estimate nearly 6 billion barrels of economically viable resources could be left in the ground, not to mention a further 11 billion of contingent resources.”

But all is not lost, yet.

“Short-cycle, strategic tie-backs are still likely to go ahead. About 3 billion of the 6 billion barrels of economically viable resources breakeven below US$50/bbl (NPV15); further cost reductions or a price recovery could quickly make them viable again. “

 But major cost reductions from the service sector are unlikely. Demand for services will undoubtedly fall, but the supply chain may take the opportunity  - or be forced - to reduce its footprint. There is no guarantee costs will be lower in the future. E&Ps will need to revisit development plans to achieve material reductions.

And the traditional North Sea players may not be willing investors. The Majors will defer capital elsewhere and the sector's independents will struggle financially, particularly if banks look to decarbonise their portfolios.

“Could private equity come to the rescue again? With several unmonetised vehicles already on the shelf, a new wave of money is not certain. What was already looking like a difficult exit story just got a whole lot harder.” Boroujerdi said. 

The picture isn’t quite as bleak in Norway. Over 60% of investment comes from locally-focused players with strong balance sheets. But a recent wave of FIDs mean Norway plc needs a Brent price of US$40/bbl to avoid negative cashflow for the first time in over a decade.

He added: “At a time when there is public pressure to move towards more a 'greener' energy mix, it’s hard to see governments easing the fiscal terms. 

“Long term, the energy transition needs to accelerate but there’s a risk of short-term stagnation. For the companies that survive, they will need to adapt to a greener future.”