COMMENT: Cautious optimism for oil and gas sector in 2018

Bob Ruddiman is partner and head of oil and gas at legal firm Pinsent Masons

On our own North Sea doorstep, in 2017 we have also witnessed a less colourful but just as interesting changing of the guard, with a wave of mergers and acquisitions bringing on board new entrants to the UK Continental Shelf (UKCS), as some major operators loosen control after 50 years of hydrocarbon dominance while others sharpen their focus on core areas for investment.

Shell’s $3.8 billion disposal of a package of North Sea assets to Chrysaor was the largest of the exploration and production deals in the last 12 months that also saw a significant uptick in infrastructure changing hands – EnQuest acquired an interest in the Sullom Voe terminal from BP, and Grangemouth refinery owner Ineos expanded its portfolio with the purchase of the Forties pipeline system.

The oil and gas industry, more than most, must change with the times and there is a cautious optimism that as the “old guard” redefine where they are deploying global resources, that ready to take their place is a new generation of owners who will inject fresh thinking and renewed impetus to maximise recovery and returns from an ageing basin.

Looking ahead in 2018, we have to hope that optimism filters down to the supply chain, which continues to face tough trading conditions, and resulted in a number of notable mergers or acquisitions such as Wood Group’s purchase of Amec Foster Wheeler.

A dramatic reduction in contractor rates, coupled with massive reorganisation and pressure to innovate and integrate, has taken its toll on a number of well-respected firms in the last few years. Working capital constraints, lower-than-anticipated levels of activity, and business models based on an anticipated higher oil price make for extremely challenging conditions not conducive to encouraging the investment needed to foster the talent and create genuine innovative solutions the industry now demands.

On a positive note, the Westminster government gave a welcome commitment to the North Sea when it announced in the autumn Budget that it would relax regulations around the transferable tax history of assets.

It seems, largely down to the good work of industry lobbyists and in particular Oil & Gas UK, that the government has at last been listening. It is also encouraging that progress continues on the vexed question of decommissioning. It seems the tone of the conversation has altered, and there is more willingness to discuss how this billion-pound industry can evolve to suit all stakeholders.

However, there is always a “but”. While there is more harmony and cohesive thinking on how to deal with conventional hydrocarbons, confusion remains around the proposed development of the UK’s onshore asset base.

In England and Wales there has been careful progress on supporting the emerging shale gas industry, but north of the Border the Scottish Government confirmed its moratorium on planning applications for the extraction of unconventional hydrocarbons.

Increasingly complex geopolitics – renewed tension in the Middle East, a US President focused on putting America First and with a disregard for long-established trading relationships – inevitably impacts on global energy markets. This makes it more important than ever, that as we prepare for life after Brexit the UK needs to establish a well-considered energy policy that realistically addresses security of supply issues and maximises our natural resources while being cognisant of climate change and environmental issues.

Bob Ruddiman, partner and head of oil and gas at legal firm Pinsent Masons