Oil Service Co.'s Shy Away from North Sea

February 4, 2009

By William MacNamara, The Financial Times

The North Sea oil boom has ended, most British offshore oil and gas industry operators agree.

Project financing channels are frozen and the oil price has fallen to under $50 per barrel, leading threequarters of offshore operators to expect reduced activity this year, according to a survey by the chamber of commerce of Aberdeen, the centre of the domestic oil industry.

Geoff Runcie, the chamber's head, urged the government not to ignore the industry whose decline has been so rapid that its full effects had yet to be absorbed.

"It is crucial that the UK government implements in the forthcoming Budget a long-term fiscal and energy policy that recognises the high levels of dependence on hydrocarbons and ensures the continued competitiveness of the UK continental shelf," he said.

The UK oil industry could now expect a period of consolidation, suggested operators who were surveyed.

That is not entirely bad, according to some in the industry, who have said that in addition to drilling equipment being easier than ever to obtain, cash buyers will have unprecedented opportunities to pick up undervalued North Sea assets in anticipation of the next upswing.

Graham Stewart, chief executive of Faroe Petroleum, which operates in the far North Sea, said the company was looking to coinvest with sovereign funds or private investors in distressed North Sea companies - and was receiving daily overtures from such potential partners.

Oilexco North Sea, the most active driller of appraisal wells in recent years, signalled the North Sea bust when it entered administration in January.

Mr Stewart estimated weeks earlier that Oilexco and 20 other oil producers around the North Sea were on the verge of failure.

Many ventures were only viable at high oil prices, given the costs of producing oil offshore in Europe. North Sea production costs have been estimated at about $40 per barrel, compared to today's prices of some $45 per barrel.

Bill Murray, chief executive of the Offshore Contractors Association, called on the government to "bring forward tax reliefs or allowances to bolster activity until the economy recovers".

A prominent concern among those surveyed was the long-term effect of losing skilled offshore oil and gas workers during the downturn. Now facing unemployment, they might decamp to more competitive oil-producing regions and decide not to come back, some warned.

"The management of the eventual upturn will be significantly more difficult with shortages of skilled people," said Chris Stang, director of the Well Services Contractors Association.