Oil and gas production in the North Sea became viable due to the 1973 oil crisis. The Arab-Israeli conflict caused a serious disruption that led to skyrocketing prices. Energy security became an important issue, which supported the development of the North Sea’s energy resources. However, the industry has been in decline due to sustained lower prices in the past decade. The current crisis could be the final blow to an industry that was already struggling to survive. The North Sea enjoys several advantages that have made it an interesting investment destination. First, oil and gas fields are relatively close to consumers. The development of the region has created one of the most elaborate pipeline infrastructures in the world. Second, the industry enjoys exposure to highly developed economies in northwestern Europe that supply human capital and other necessary resources such as harbors.
However, production costs in the North Sea are relatively high compared to, for example, the Middle East. According to Kevin Swann, research analyst at energy consultancy Wood Mackenzie, energy companies need prices above $40 to maintain profitability. A window of $60-$70 would be “comfortable”, while $40-$50 puts many projects in the “risk zone”. On average globally projects are sanctioned at a breakeven oil price of $35 per barrel. Currently, Brent Crude is traded for approximately $25 and it could slide even further.
The current crisis comes at a time when the industry is recovering from the oil price plunge of 2014-2016. According to Oil and Gas UK (OGUK), 2020 will be remembered as a “perfect storm”. Due to COVID-19 most of the global air fleet is grounded, transportation vehicles are safely parked, and a significant portion of the world’s economy has ground to a halt. The crisis has decreased demand by approximately 16 million barrels, which is unparalleled. The disagreement between Saudi Arabia and Russia over production cuts, and consequentially the war for market share has decimated the industry even further.
The crisis has significantly affected the North Sea’s energy industry. The number of workers that operate oil and gas platforms under normal circumstances stands at about 11,500. But that has already fallen to 7,000 within just a couple of weeks, which is a decrease of 35 percent. Companies have aborted all non-essential work. Also, the continued risk of infections is another threat that could derail certain operations. Rystad Energy has predicted that more than one million workers in the oil and gas industry could lose their jobs in 2020.
According to OGUK chief executive Deirdre Michie, “businesses and industries across the UK are facing extraordinary pressures, but coming so soon after one of the worst downturns in our history, it shows that this sector is now in a paper-thin position.” Besides downsizing and financial risks, losing skilled workers and technological know-how in the long-term is another threat.
While the majority of the North Sea’s oil and gas industry is in turmoil, Norway is starting production at the giant Johan Sverdrup oilfield. Its discovery was well-timed in 2010, but the current crisis is shedding another light on the project. Although a peak production of 470,000 barrels/day in May is not good news for the market, the fields operator and the Norwegian state will gain. Production is profitable at less than $20, which makes it interesting despite the industry’s downturn.
Although the crisis puts the industry in a difficult position, prices will eventually increase. The long-term outlook for oil and gas, however, is still bleak, not counting some exceptions such as Norway’s Johan Sverdrup oilfield. The North Sea’s geographic characteristics create opportunities for companies now involved with fossil fuels. The sea is relatively shallow, surrounded by densely populated countries with highly developed economies that have voiced strong support for the energy transition. The region is already being revitalized as a major energy production area where thousands of sea-based wind turbines provide clean energy.
Therefore, companies that are now mostly engaged with oil and gas production could reinvent themselves towards service for the offshore wind industry. However, first, the current unprecedented COVID-19 crisis needs to be overcome.
By Vanand Meliksetian for Oilprice.com
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