2. 1
Contents
The UK Continental Shelf - A Time for Action
Background 2
Executive Summary 3
Setting the Scene 4
The Current Situation on the UKCS 5
The Effects of the Oil Price 7
A Way Forward? 8
- Cost Reduction 8
- Production 9
- Collaboration 11
- Investment 11
- Consolidation 12
Grosvenor Clive & Stokes – Our Work in the North Sea 13
3. 2
Background:
Grosvenor Clive & Stokes
Grosvenor Clive & Stokes is a specialist international executive search and advisory services firm with
a long heritage in the energy sector. For over fifty years we have worked across the Oil & Gas value
chain and in the Power, Renewables and Nuclear sectors for developers, E&P companies, power
generators and utilities. Our involvement across the development lifecycle from initial fund raising to
project development and operations gives us a unique insight into the activities of the industry. This
is complemented by a number of our partners who have spent significant parts of their career in
senior roles in the energy business, thereby bringing a wealth of knowledge and experience to the
firm.
During the last two decades, we have undertaken many assignments in the North Sea working in the
oil and gas upstream arena as well as the power and renewables sectors. Our clients range from
multi-national and integrated energy companies to state power utilities and independent oil
companies.
Over the past few months, Grosvenor Clive & Stokes has sought the views of a broad cross-section of
energy industry executives to gauge the impact of the current oil price volatility. This document
distils those conversations into a review of the current thinking and takes into account data from
other sources including The Wood Report and statements from the OGA and industry bodies.
The Author:
Tim Shingler has worked in international Upstream Oil & Gas recruitment since 2003 specialising in
senior subsurface and commercial appointments. His clients include a wide range of energy
companies from global multinationals to the independent oil producers. He also has a strong
relationship with the Oilfield Services industry and the Consulting sector, where he has a particular
expertise in recruiting for specialist advisory firms operating in Exploration & Production.
Tim has a truly international network and client base, having worked successfully on assignments in
Europe, the Middle East, Asia and Australia as well as in Africa and the FSU.
Prior to his career in executive recruitment, Tim spent many years working in the oil industry, firstly
with Shell UK Exploration & Production, then as an oil analyst with James Capel & Co. and latterly as
the Director leading the Petroleum Service Group at Arthur Andersen. Tim is a member of the
Energy Institute (EI), the Petroleum Exploration Society of Great Britain (PESGB) and the SE Asia
Petroleum Exploration Society (SEAPEX).
ths@grosvenorcliveandstokes.com: +44 (0) 7785 772649
4. 3
Executive Summary
The UK sector of the North Sea is a highly productive arena for the international oil and gas industry
and has attracted companies for the past fifty years. Oil and gas have been produced from a range
of reservoirs utilising fixed and floating facilities. The industry has created a world-class workforce
which has been exported around the globe. Due to the extreme weather conditions prevailing in the
North Sea, the industry has been at the forefront of both technological development and safety
regulation.
However, as a mature and challenging environment, the region has suffered from the dramatic fall in
oil price which has put pressure on all operators to reduce costs, slim down the work force and
investigate early decommissioning as fields mature and costs increase.
The government has reacted to the decline in production by requesting Sir Ian Wood to investigate
the issues facing the industry. His report recommended, amongst other things, the establishment of
the Oil & Gas Authority (OGA) to help guide the sector towards the maximisation of economic
recovery in the UK North Sea.
The following points are highlighted:
The North Sea has been a major contributor to HM Treasury over the past forty years
Oil and gas production has been a major contributor to the security of supply for the UK for
decades and still produces over 50% of the nation’s demand
A substantial number of jobs have been created for the country including a cadre of world
class expertise which has subsequently been exported to all parts of the global energy
industry
The Wood Report on Maximising Economic Recovery (MER) from the sector made a number
of key recommendations which included the establishment of the OGA
The OGA is working to develop a stronger, more efficient and more robust industry in the UK
to ensure the future of the North Sea
The current challenge for the industry is to produce hydrocarbons for less, as the oil price is
expected to remain low for the short to medium term
Collaboration between operators and service providers is fundamental and will play a critical
part for the future of the North Sea industry
The industry must be more imaginative and flexible in the future in order to reduce costs,
improve efficiency and maintain or increase production.
Bank and Private Equity funding is available for strong management teams which provide
solid business plans that are robust in a depressed oil price environment
Time is of the essence and the industry and the regulatory bodies must act to ensure that
the North Sea has a long term future.
5. 4
Setting the Scene
The United Kingdom Continental Shelf (UKCS) is the area, as defined by international law, over which
the UK Government has ownership and regulatory powers. It has been a major area for exploration,
development and production of oil and gas reserves since the mid 1960s when the first licences
were issued by the UK Government (Ministry of Power). This followed the signing of the Continental
Shelf Act of 1964. The Act set out the terms for licensing of the North Sea for companies to apply for
licences covering standard UKCS blocks. Each block is 12’E x 10’N producing 30 blocks in a standard
quadrant. These quadrants are each one degree latitude by one degree longitude. Each block
covers an area of approximately 250 sq. kms.
The first round of offshore licensing in 1964 resulted in some 53 licences being awarded covering a
total of 348 blocks to 31 companies. These blocks were primarily in the southern North Sea.
Interest in the southern North Sea had been generated by the discovery of the giant onshore
Groningen gas field in 1959 by Shell. The field is situated in the Northeast of the Netherlands and is
still Europe’s largest natural gas field. The field lies in the Southern Permian Basin which extends
from the eastern coast of England to Poland. It is this geological feature that excited oil executives
at the time and spurred on the exploration for gas in the UK.
As a footnote: gas had been discovered and produced in the late 19th
century in southern England at
Heathfield. Oil was produced from the East Midlands (Dukes Wood and Eakring) and the northwest
at Formby, to provide oil for the Royal Navy in the Second World War. The Eakring & Dukes Wood
fields produced over 2.2 million barrels of oil for the war effort and by 1964 had produced over 47
million barrels before a single North Sea well had been drilled.
Since 1964 a total of 28 offshore licensing rounds have been held, covering all areas of the UKCS in
the North Sea, Channel, West of Britain and West of Shetlands. The results of the 28th
Round of
Seaward Licensing were announced in November 2014, by the Department of Energy and Climate
Change (DECC). A total of 134 licences covering 252 blocks were awarded making the round one of
the most successful in the history of the UKCS. However, these applications were made before the
oil price crashed!
In production terms, the first commercial gas field to come on-stream was in 1967 with West Sole
operated by BP while the first oil field on-stream was the Argyll field in 1975 operated by Hamilton
Brothers. A significant number of oil and gas fields have been discovered and developed (over 300)
providing the UK Treasury with significant revenue through a range of taxes. UK oil production
peaked in 1999, producing over 2.7 million barrels per day (MMbpd). The UK had been self-sufficient
since the early 1980s but returned to being a net importer during 2004.
Over the years, the UKCS has seen a number of world-class fields developed and produced including
Brent, Forties and Ninian (all +1 billion barrel oil fields) whilst Leman, Inde and Morecambe are
world-class gas fields.
The North Sea has seen some of the most advanced technology used to find and extract
hydrocarbons with the UK being recognised as one of the global centres of excellence for both skills
and equipment. Due to the inhospitable weather conditions, the region has also seen the de-
manning of platforms as technology and computer operated facilities have reduced costs and
improved efficiency.
6. 5
The Current Situation on the UKCS
As new commercial reserves become more difficult and expensive to find, the region has seen a
decline in exploration activity for some years and a significant fall in the production of both oil and
gas since 2000 (see Figure 1 below).
Fig. 1 – North Sea oil and gas production profile from 1970
Courtesy of Gas Matters and BP
As other provinces offer higher potential rewards and, in some cases, better fiscal conditions, the
UKCS is losing investment and interest. For example, Norway has seen a continued good level of
exploration activity and production levels as the government has made efforts to retain players and
allow exploration costs to be part funded by tax relief. However, this has promoted the drilling of
wells with low success ratios.
North Sea oil and gas production has been of significant importance for the UK providing revenue to
the Treasury, security of supply through nearly half a century and significant employment in the
high-tech and skilled sectors. It is estimated that over 450,000 people are employed by the North
Sea business.
Production has come from over 300 fields in the sector and despite the fact that production of oil
and gas are both declining, they still provided more than 50% of the UK's demand in 2014. Oil
production is scheduled to rise slightly in 2016 and then continue to decrease over several decades.
However, this decrease could accelerate if new fields and exploration drilling are adversely affected
by the lower oil price. As the level of drilling continues to decline, new discoveries will not be made
and the pipeline for the future will be severely affected while lower oil prices prevail. This may also
result in further unemployment and the loss of key technical skills from the industry.
7. 6
A total of only 13 exploration wells were spudded in 2015 whilst 14 exploration wells were spudded
in 2014. Appraisal activity was limited to 13 wells in 2015 recording the lowest level of E&A activity
for some decades. The recent 28th
Round of Offshore Licensing was deemed a success but only five
firm wells were offered with a further four as contingent. It is unlikely that the level of E&A drilling
will climb in the near future although the OGA is exploring methods to stimulate activity. Recent
drilling activity is a long way off the record level of 157 exploration wells drilled in 1990.
The UK North Sea has seen many of the majors reducing their investments and selling off older and
smaller fields as well as infrastructure. This has provided opportunities for smaller companies to
acquire assets, working them harder and cheaper to increase value and delay the decommissioning
of platforms.
The issue facing many of the smaller players is that these companies borrowed significant amounts
of money while the oil price was high (+US$100). After the oil price crashed in late 2014,
repayments were difficult to make. Today, debt is high and many companies established to produce
from older fields are now struggling to survive.
In addition to lower income, the cost of operating and maintaining older platforms and
infrastructure has risen adding extra pressure to operators’ balance sheets. There are fields in the
region that are losing money at US$30 per barrel. As a consequence, many operators are reviewing
the future of their assets and shutting–in fields or decommissioning pipelines. This has a knock-on
effect on some smaller fields which rely upon the larger fields for processing and export facilities.
In an effort to find some answers to the falling levels of interest and investment in the region, the UK
Government asked Sir Ian Wood to review the industry’s needs, the role of the regulator and the tax
take. He published his review ‘UKCS Maximising Recovery Review: Final Report’ in February 2014. It
made a number of recommendations including the formation of a new regulator with more powers.
It also identified the need for the new regulator to work closely with DECC and HM Treasury.
This report was written and published months before the oil price crash in late 2014. For many in
the industry, these recommendations were unfortunately too late in the game and demonstrates
the lack of an effective long-term energy policy in the UK. In April 2015, the Oil and Gas Authority
(OGA) was established. Its main goals are to increase investment and maximise economic recovery
from the region, increase collaboration and co-operation and, help resolve disputes between
companies. Many of these issues have fallen under the authority of DECC but with limited
resources and high levels of work, its effectiveness has been restricted.
However, while the Wood report made important recommendations, it did not emphasise the key
role of the oilfield services and contracting companies in the future of the sector. These companies
are global and play a significant role in technology advances as well as operating fields on behalf of
the operating companies.
The oil price has played a critical role in the process of providing opportunities for new players when
the oil price was high and money was both cheap and accessible. Now that the oil price is
significantly lower, what opportunities does the region now offer?
As can be seen from the above graph (Fig 1), UK production is declining sharply and likely to
continue to decline in the future albeit slightly increased in 2015. This could well be hastened by the
premature decommissioning of fields by the impact of low oil price. Operators need to reduce OPEX
in order to keep fields working; if this is not achievable then loss-making fields will be shut as has
been demonstrated recently by the Dunlin field in the Northern North Sea (NNS). It is not expected
that the price will increase considerably in the near term.
8. 7
As infrastructure ages and production declines, maintenance cost continue to rise, adversely
affecting the costs of operations. In mitigation, costs could be shared where a number of fields are
produced through jointly owned facilities and export routes. Costs could also be reduced by using
the latest technology in recovery methods to increase field life. However, the latest technology may
be too expensive for limited field life. In consequence, closer co-operation and collaboration is
required amongst government, oil companies and the service industry to ensure that the UK North
Sea continues to provide hydrocarbons efficiently and economically.
The Effect of the Oil Price
The price of Brent crude has been a major factor in the development of the North Sea for some
years. Brent is a sweet, light crude which is used for petroleum and middle distillates and today is a
blend of several crudes from a number of UKCS fields. It is used as a benchmark against which other
crudes are measured. Since 2004, it has been traded on the ICE exchange and is a leading marker
crude.
Its price exceeded US$140 in mid 2008 and was followed by a sharp decline to below US$50 by the
end of that year. From early 2009 the price started to climb, rising above US$100 by the end of 2010
where it stayed until mid 2014. Subsequently, there was a dramatic fall in prices to just above
US$60 by year end.
During 2015, the price of Brent has varied between US$70 at its height and by the end of 2015 was
below US$38. The price per barrel continued falling in January 2016 to below US$28 per barrel. This
is creating even more problems for operators who were hoping for better news in 2016. The price
had increased slightly on the news of more conflict in the Middle East, specifically between Iran and
Saudi Arabia. What does 2016 hold for the industry, ‘Lower for Longer’ is a popular prediction but
when did the oil price ever conform to prediction?
Fig 2 – ICE Brent Crude Price for the last year
Courtesy of ICE
9. 8
A number of analysts believe that this is not the end of large scale job losses if the oil price remains
below the US$50 price. It is anticipated that more job losses will occur as some companies are
unable to meet their debt obligations or simply fold as the cost of production exceeds the income
stream. During 2016, a number of oil price ‘hedges’ will cease, resulting in income streams dropping
further for many producers. It has been announced recently that major companies reported a
decline in profits resulting even more job losses.
As a result, the UK is exposed to losing a large number of top class professionals. This will be
amplified by the number of senior staff taking redundancies and early retirement losing the industry
valuable experience. Aberdeen has borne the brunt of job losses and the near-term future does not
look promising.
Over the past few years as high oil prices have been maintained at unsustainable levels, the industry
has approved more developments and EOR projects which, in turn, put a strain on the availability of
qualified staff globally. The effect was to increase salaries and bonuses to attract staff and retain
existing teams. Large sign-on bonuses were paid alongside generous remuneration packages which
increased G&A and added to project costs.
A Way Forward?
There is currently a need for urgent action to avoid losing production, fields, infrastructure and
expertise that has been built up over decades as low oil prices remain depressed for the near term.
Confidence in the sector is essential for investment and to attract new players. The major issues
facing the sector are set out below.
Cost Reduction
Much has been stated in the press and in statements from industry groups about reducing costs,
working smarter and co-operation but as many within the industry would say, “We have been doing
this for years”. A number of companies have made announcements to the effect that they have
brought down OPEX costs and are now returning a small profit from these fields.
Reducing costs is an important part of the equation but it is not just the offshore arena where costs
can be saved. Reducing the G&A, office costs and utilising new technology are all part of the future
when income is lower. The industry had become very heavy in resource costs paying ever higher
base salaries and offering significant bonuses and benefits packages.
New and lavish offices, many of which are now under occupied, have been built on the belief that
the oil price would not fundamentally change. Working smarter and recognising that every new
project does not need to start from a green field thought process should be the norm not the
exception. Utilising existing and proven methods, in conjunction with existing designs are cost
effective and usually more reliable. Re-inventing the wheel which requires longer lead times and
greater investment has been part of industry life.
This is not the first time that the UK has endeavoured to reduce costs. In the 1990s, we had the
CRINE initiative (Cost Reduction in the New Era). This was heavily promoted by companies and
government bodies and was followed by further schemes to keep costs low and share information.
Sadly, when oil price rises, memories are short.
10. 9
Another scheme is PILOT which was established some years ago and evolved from the Oil & Gas Task
Force. PILOT facilitates the partnership between the UK oil and gas industry and Government. It did
not foresee the problems of low oil price and was as unprepared as the industry for the dramatic
changes caused by the price slump.
Contractors also need to recognise that they are part of the equation and need to reduce prices if
they wish to retain their workforce. One industry professional speculated that “prices in Aberdeen
need to fall by between 30% and 40% for the industry to keep working”. The service industry has
also been shedding staff while it reassesses the true need for resource against client requirements.
The operators and partners need to work closely together to achieve the optimum development and
recognise that both need to make a profit to remain in business. It is within this area of
collaboration and co-operation that significant cost savings will be found.
Production
As the following graph shows (Fig 3), UK production has been declining for some years. However, in
2015/16 production is expected to increase slightly.
How long can significant production continue as the decommissioning of older and non-profitable
fields starts to impact the nation’s supply?
The danger for the near-term future is that new developments will be stalled or shelved until prices
rise again, thus causing significant dips in production.
As the infrastructure of many of the older fields reach the end of planned life and maintenance costs
increase, operators need to look to new technology and ‘best in class’ operations to reduce costs
and maintain or raise production. The Wood report stated that operators needed to explore ways of
extracting the maximum from each field and the OGA is looking for operators who will maximise
economic recovery – so, every option must be explored and shared with others to bring about the
changes required for a stronger industry that meets the challenges of the low oil price environment.
In some cases, smaller operators could look to:
(i) Merge operations where assets are in close proximity thus reducing costs
(ii) Develop smaller fields ‘smarter’
(iii) Monetise stranded assets by providing easy, economic access to infrastructure
The above actions could reduce waste, maximise recovery and keep some of the smaller fields
producing profitably. To promote this idea would need significant co-operation at board level to
ensure that the new entities have the best people leading their growth.
On the subject of infrastructure access, perhaps the newly established Oil & Gas Authority (OGA)
should be the arbiter to persuade companies to share, at economic prices, their facilities, thus
enabling longer term production with lower costs. This could have the effect of extending the life of
some fields as well as bringing on-stream ‘stranded’ fields that would otherwise remain dormant.
In a white paper published by the Offshore Network, it identified that there were over two billion
metric tons (c.14 billion barrels) of oil remaining in reservoirs of produced and producing fields on
the UKCS. These figures are derived from numbers published by DECC stating that average oil
recovery was 66% and that 3.3 billion metric tons had been produced between 1975 and 2013.
11. 10
If the industry, in collaboration with the service sector, could increase recovery (cost effectively) by
small percentages, this would improve levels of production. This is where effective reservoir
management and surveillance combined with production optimization and EOR projects could make
a real difference.
However, it should also be noted that, if new fields are to come on-stream over the next decade,
then exploration activity must continue. The danger of the low oil price environment is that
exploration drilling will slow or stop resulting in the pipeline for potential new fields being empty.
This will inevitably cause a ‘mad –dash’ when prices start to rise and repeat the boom and bust cycle
of the oil industry.
Figure 3 – UK Oil & Gas Production 2004 – 2014
Courtesy of DECC
12. 11
Collaboration
Is there a new way of looking at the development and future investment for the UK North Sea?
An important issue is the number of players and the lack of co-operation, so is there a case for
regional operators allowing for economies of scale through one supply chain thus reducing costs and
increasing efficiency?
Operators need to appreciate that increased competition is not necessarily the answer in
operations. One commentator recently stated that “...the most important time period when oil
companies have a competitive advantage is during licence round application. Once these are
complete and the winners of the assets are confirmed, where is the competition?” So why not share
much more information in the operating arena? Is this anti-competitive or could it be one of the
elements saving the future of the UK North Sea?
Maximising cost recovery from JV partners and structuring supplier contracts to minimise budgeted
costs is great for the operator but these actions do not promote collaboration nor the sharing of
business risk. There needs to be a change of view, from competitors to partners thus helping to
grow knowledge and efficiency.
In a recent survey of oil companies and oilfield service companies, Deloitte stated that “a lack of
effective supply chain collaboration means that companies are missing out on maximising the
potential value of the UKCS”. They went on to say “the most critical finding highlighted the
discrepancy between what drives successful collaboration, and the actions of leadership and
business process to underpin it. Whilst there was clear recognition of the value of collaboration and
what’s needed to make it happen, trust and mutual benefits for example, less than 10% said that
leadership regularly emphasised its importance or included it in their business strategy”.
Commenting on the Deloitte report, Oil & Gas UK said “Collaboration is crucial if we’re to fulfil Sir Ian
Wood’s vision to maximise economic recovery from the UK Continental Shelf”.
Investment
Investment is imperative for the long-term future of the sector. Will Private Equity firms play a more
important role as investors look for new opportunities to invest whilst interest rates are low?
We have seen in the press recently a number of PE companies funding new companies to take
advantage of the low oil price effect on asset values. This is based on the premise that prices will
rise again but when? General consensus suggests that oil prices are expected to remain low
throughout 2016 with some increase appearing in 2017 but will this be too late for some?
There will be more casualties and more job losses over the coming months but, on the positive side,
industry will become more efficient. Private Equity will fund management teams that have a proven
track record and a good business plan. Also, some new players will enter the market to work in
niche plays with problem fields. If changes are made to the fiscal regime, more players will consider
investing in fields and potential exploration programmes.
13. 12
In general, Private Equity has looked at investment in the oil sector as short-term whilst the industry
needs long-term investment for long-term field development and maximising recovery. If
investment is short-term then development strategies tend to be short-term leading to lower
recovery rates. Perhaps now is time to rethink the investment strategy to provide for the longer-
term
The need for cutting costs and improving efficiency will inevitably drive some companies to look at
mergers and/or acquisitions to increase value and lower costs. The sector has a number of players
with good assets but no cash and whose options, in consequence, are limited. Merging may be one
answer to help these companies ride out the storm of low oil prices.
Consolidation
The need for change in the industry goes without saying but can these changes be made quickly
enough? The danger is that whilst dialogue continues, we lose production from fields that are
uneconomic and unlikely to be re-drilled when the prices rise. In addition, we lose significant
numbers of highly skilled professionals who are unlikely to be tempted back to the industry.
Furthermore, we lose investor confidence that hastens the demise of the UK North Sea.
Exploration needs to continue to ensure a pipeline for the coming years to keep both sides of the
industry active. Service companies need to work closely and collaboratively with the operators to
produce more efficient and cheaper operations resulting in a healthier industry. The regulators and
Treasury also need to provide stimulus to ensure that activity continues and the security of supply is
maintained. The United Kingdom Continental Shelf has an economic future but all parties concerned
must play their part in delivering its continued success.
14. 13
GC&S – Our Work in the North Sea
Grosvenor Clive & Stokes has over 50 years’ experience of recruiting in the international energy
sector. Our clients, large and small, work in the oil and gas, power, renewables and solar sectors.
We have developed an in-depth knowledge of the North Sea region and worked for many of the
companies working in the region.
Our work has included projects to find General Managers and their Leadership Teams as well as
heads and senior managers for all the technical, commercial and support functions.
