Despite bullish noises from OPEC…
Oil prices gained on Monday…
Crude’s continued decline is threatening to make many projects uneconomical for operators. That’s not much of a concern in the short-term given that the world is currently awash in a sea of oil. Over the longer term however, a continued weak oil price environment could lead to a drastic slowdown in exploration and as lack of future supplies. This, in turn, would lead to much higher prices several years down the road. That kind of price volatility is not good for anyone – consumers or producers.
It is reassuring then to see that at least a few players in the oil space are trying to think longer term. BP in particular comes to mind here as the firm is dramatically increasing its investment in the North Sea. The North Sea has been hit hard by plunging oil prices, relatively high costs including extraction taxes, and all of the problems associated with aging oil fields.
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The North Sea has seen production fall 70 percent from its peak more than a decade ago, and the British government is so concerned about the future of the field that it announced a major tax cut earlier this year for petroleum producers operating there. There has been a small uptick in production since that announcement, and some speculate that there may be a renaissance in the area. That would be good news for the industry over the long term.
The North Sea field is a reliable producer in a politically stable region of the world. That makes it an important staple in the industry. It unclear if the uptick in production is sustainable, but one key to a sustained increase is greater investment. That is where BP comes in.
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BP recently confirmed that it plans to invest $1 billion in a cornerstone North Sea asset. That’s a major vote of confidence in the field at a time when almost no one has any confidence in the energy industry at large. BP’s investment will add 15 years to the lifespan of its project, and will keep a key asset running well into the future. BP’s Eastern Trough Area Project (ETAP) has been a major producer for the firm for close to two decades and has produced more than 520 million barrels of oil.
The investment is even more important in that it represents a crucial vote of confidence in the future of offshore drilling. If it has been a bad year for oil, it has been a true catastrophe for offshore drilling firms. BP’s investment helps to show the market that at least one oil major still sees a long-term role for deepwater in its portfolio. Enesco and Byford will be working on improving the aging field for BP, and that should help give ESV’s investors at least a little confidence in the value of their severely beaten stock.
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BP’s move while significant, is really a reflection of the move by the UK to reduce taxes and stream line the governmental costs associated with the North Sea. The truth is that at times like these, governments need to show confidence in the future of the energy industry and do what they can to ease the tax and regulatory burden the industry faces. Just as stimulus packages can help the broader economy during a recession, directed stimulus in the form of reduced energy industry regulatory hurdles can help keep the industry afloat during the downturn. Britain and BP have both done their jobs in this case, and taken a small step forward towards stable production in the future regardless of how long the slump lasts.
By Michael McDonald of Oilprice.com
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Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…