A 2.0 silver lining?

Elaine Maslin

October 1, 2015

Low oil prices, falling investment and the need to transform the UK exploration and production sector were high on the agenda at SPE Offshore Europe. Elaine Maslin reflects.

A packed plenary session during SPE Offshore Europe 2015. Photo from Reed Exhibitions.

Cost cutting and efficiency measures were supplanted by a new rhetoric at SPE Offshore Europe 2015 – the need for a complete transformation.

The statistics are certainly bleak, at least for the short-term. While numbers held up at this year’s show – some 55,947 attended, the second highest attendance rate for the event, according to the organizers – there are clear signs of stress in the industry.

Oil & Gas UK’s 2015 Economic Report, revealed on the second day of the conference, outlined a 15% reduction in jobs, or 5500 posts, in the industry since the end of 2014.

The report anticipates the UK North Sea industry will make a 22% reduction in costs by the end of 2016. It says operating costs are expected to fall from £17.8/boe in 2014 to £17/boe in 2015 and then by a further £2-3/boe by the end of 2016. But will this be enough? Take out the costs saved by the 15% reduction in staff and the numbers do not seem that great. Next, compare the reduction in costs to the reduction expected new investment, i.e. the source of new work. Capital investment is expected to drop from a record £14.8 billion in 2014 to £10-11 billion this year, then by £2-4 billion in each of the next three years. That’s a 29% drop this year alone.

Even with better results in terms of efficiency and cost cutting measures, there’s still the stark issue of exploration rates. “The three-year average of around 55 MMboe of recoverable reserves discovered per year is the lowest since exploration activity began on the UK Continental Shelf,” states the report. Without exploration, there will be no new barrels to produce.

But, few believe the situation is irretrievable. The lower-for-longer oil price environment is now accepted and many actually believe this will be healthy for the industry, with at least two conference speakers chanting the mantra – “don’t waste a good crisis.” The fat, built up amid high oil prices and easier profits, will be cut, new technologies will be adopted – and the signs are there already that small-tech companies dealing in data-based analytics are already being welcomed by operators, according to PwC’s Jon Shelley. This is an opportunity for the industry to embrace that long talked about E&P2.0 espoused by 2015 SPE President Helge Hove Haldorsen – smart technologies, condition-based monitoring, real-time analytics, automation, and new business models.

Hydrocarbons, it is accepted, will still be needed for decades to come – the fundamentals are there. But, “we can’t just cost cut our way to greatness; new technology, new business models and collaboration2.0 are necessary to achieve the desired ‘Extreme Makeover E&P Edition’,” Haldorsen says.

Embracing different business models, such as unbundling access to infrastructure from asset ownership, could in itself provide new investment, according to a presentation in a technical session by experts at the University of Aberdeen. They modeled the effect of unbundling access to infrastructure from asset ownership and worked out that doing so could increase the net present value of North Sea fields by up to £10.93 billion and see up to 34 new fields developed.

It’s also not all about exploration and production. A new business stream is finally starting to open up on the UKCS. In a report commissioned for SPE Offshore Europe, Wood Mackenzie said the low oil price is halting the high oil price-fueled investment in mature fields seen in the past few years, leading to ramp up in decommissioning activity and spend over the next five years. Some 140 fields could cease production over the next five years, suggests Wood Mackenzie, even if oil prices return to US$85/bbl. They also put the cost of decommissioning the UK North Sea’s assets at an eye watering £54 billion.

Either way, new entrants to the industry will still be needed for decades to come. Fields are still being developed, not least Clair Ridge, Mariner, Culzean and maybe even Rosebank. Which means the industry still needs to give a positive message, to “inspire the next generation” – the theme of this year’s event.

Both event chairmen, Charles Woodburn, CEO of Expro Group, and Michael Engell-Jensen, executive director of the International Association of Oil & Gas Producers (IOGP) agree that more needs to be done to both inspire the next generation and help those newly qualified graduates who have been caught out by the current economic difficulties.

How well the industry has embraced all these themes will no doubt be topics at the next SPE Offshore Europe, due to be held in Aberdeen 5-8 September 2017, complete with at least one new feature to reflect the current environment – a Decommissioning Zone.