Rising costs push North Sea deals to ‘steady low’

The report found that poor weather and high costs have made an impact. Picture: Hemedia
The report found that poor weather and high costs have made an impact. Picture: Hemedia
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Oil and gas industry activity in UK waters will remain at a “steady low” for at least the next year, according to a new report from accountancy firm Deloitte.

The report, published today, found that poor weather and high costs have already had an impact on the amount of exploration and appraisal (E&A) work conducted by operators in the region during the first quarter of this year.

There were also fewer deals completed compared with the same period last year, with ten reported in the last quarter compared with 19 a year ago.

Graham Sadler, managing director of Deloitte’s Petroleum Services Group, said the drop in deals could be due to a gap in price expectations between vendors and buyers. He said: “It is very likely that what we’re seeing is a result of the continuing higher operating costs and the ongoing challenges of a mature region.

“These could be having a knock-on effect on deal flow, since sellers might be seeking a higher price than buyers may be willing to pay.”

Sadler believes it is also telling that farm-ins – where one company takes a stake in another company’s field – remained the most prevalent type of deal, making up 50 per cent of the total for offshore UK.

“When profitable extraction is more challenging for operators, farm-ins are the most popular type of deal,” he said. “Bringing another company in helps to spread risks and costs within the time frames required. Operators are definitely showing more caution, indicating, again, that incentives from government may be the only way to make the economics more viable.”

This caution is underlined by the fact that only two gas fields started producing this quarter and one condensate field was approved for development. All of these received the small field allowance.

The UK government’s support of recommendations made in Sir Ian Wood’s recent report on the industry is described as a “positive step” that may lead to measures being put in place to incentivise activity offshore.

However, while the recommendations of the Wood Review are good news for the industry, tax changes confirmed in last month’s Budget could lead to additional costs for North Sea operators. The changes to the way “bareboat” chartering is taxed applies to companies operating on the UK continental shelf which are leasing rigs and offshore accommodation.

Deloitte says measure will increase costs and lead to upward pressure on day rates at a time when operating costs are already at an all-time high.

Derek Henderson, office senior partner for Deloitte in Aberdeen, pictured, said: “The sector is in for a long haul back to anything like the performance of the peak years.

“We’ll need to see a concerted effort from government and industry to restore confidence in the sector in the short term and to ensure maximum recovery in the long term.”