Offshore Europe: Westwood analyst sees optimism in Aberdeen despite North Sea region’s challenges
During its 50th anniversary run, Offshore Europe’s participants have shown a remarkable, collective optimism about the future of offshore energy, whether it be oil and gas, wind generation, CCS or hydrogen. This seems to fly in the face of a number of well-documented challenges that the UK faces, including a deterioration of the country’s North Sea capabilities. For a quick reality check, we talked with Westwood Global Energy Group’s Research Director for Northwest Europe, Yvonne Telford, in the following special interview.
World Oil (WO): Let’s begin by talking about the mood of participants at Offshore Europe, which seems quite good.
Yvonne Telford (YT): Funny enough, somebody asked that earlier, and the show seems vibrant, which is contrary to the kinds of challenges that I think the UK is facing. This is in terms of our oil and gas outlook in the UK on the investment sentiment from the E&P companies. This is, as you may or may not know, because of this wonderful tax they call EPL, which is the Energy Profits Levy.
WO: We know it well.
YT: So, I know that I don't need to explain it to you that they had two changes in a year, along with political instability and a forthcoming general election. An appetite for investment is just not there, and having [once] worked for Apache, I think I always go back to (former CEO) Steve Farris and his words—"And when they (financiers) arrived, they always used to tell us if we were looking at pitching for money or pitching for investment, it was ‘well, you're a shareholder, you're part of this company. It's your money. Would you do it?’” And given that rhetoric, I think a lot of the CEOs of oil and gas companies are seeing it. But if you put yourself in their positions, what would you do?
WO: Fair enough.
YT: It's like you've got $1 billion to spend, even on electrification, which has a very attractive investment allowance, where you've got tax relief and it should be a no-brainer. So why are companies not going after it? It's the political uncertainty. You don't know if the rug will get pulled out from below your feet tomorrow. Would you want to commit? Probably not, if you were in their shoes. So yes, the mood of the event is counter to what I would expect, based on the investment sentiment. Perhaps it's because of the fact that this is a sector that goes for problem-solving, and not just in the UK. I think every area of oil and gas has the same sort of problem-solving mentality.
I don't know whether it's a group of engineers together, or it's the oil and gas rhetoric, but the mindset with these issues and challenges that society always faces is that they solve problems— despite the challenges or in spite of the challenges. So, in spite of the work and the looming uncertainty that people are currently going through, I've been in this industry long enough to say, who knows where we'll be in two years?
WO: There is quite a bit of truth to that.
YT: So, I think if you look ahead two years, you hope that common sense, for want of a better word, will prevail with whatever political party [in the UK] ends up in power. They need to understand that the UK is a net importer and because of that, UK domestic production is important to minimize imports from of LNG, which are higher in emissions.
WO: Sometimes these officials can't see those things.
YT: Well, they really can't see it when one lives in the late shows coming off the political spectacles. And that's frustrating. I think it's very frustrating for the UK, because, at the moment, the rest of the world is ramping up activity and investment. And that's not just in oil and gas projects. That's also with the ramp-up of renewables projects. We have that ramp-up in renewables on very ambitious targets in the UK. You'll have heard that many, many times over the last few days [at Offshore Europe]. I hate to go over old ground and throw figures at you, but it's an exponential, projected investment of billions and billions of spend that the wind sector requires in the next ten years, whereas we're looking at rapidly declining capital investment in oil and gas in the UK sector.
And if that happens in the next ten years, given that we are a very mature region, it’s critical to how much [oil and gas] infrastructure we could potentially have left. So, we did some analysis for a development and exploration conference that was here in May and then rolled out last week with some further analysis, just looking at our bottoms-up approach to commercial field goals. We do for the number of fields traced back to processing hub. At the moment, the UK has a 74 field hubs under development for producing. And by 2028, based on current investment funds, the number of hubs could be reduced 25%. In the next five years, the number of hubs could be down to 56. And then, by 2033, that number could go down to 22 in ten years’ time.
And that's because of the age of our basin and, a lot of the fields are hinged on investment decisions that are made now or in the next five years. A couple of in-fill well programs could boost production just enough that it keeps them going. It's all based on the potential to close by 2033. The decisions that are made affect such a huge chunk of those platforms, that infrastructure. There are 34 hubs in that 2028-2033 range that account for a third of the UK’s 2023 production. Those are 34 hubs that have the capability of moving, with one or two wells drilled into the existing field areas, where there is tie-back potential. And there's potentially a huge number of tie-backs. There's 7 billion bbl of potential undeveloped discoveries in there.
WO: But they're not getting the incentives.
YT: They're not getting the incentives. But they've been stranded for many years. That's not recent either. There has been —I don't use the word systematic—but it's been an ongoing challenge for many years to unlock some of these undeveloped discoveries. Some of it being technical challenges, like the ultra-heavy oil fields and some of the northern North Sea platforms. Ultra-heavy oil is challenging to develop economically. Thus, you have a chunk that's stranded because of technical challenges. Then we have the chunk that's too small. And then there's the challenge of competition for capital. And that then affects the majors, the international companies, the companies who need to get reserves-based loans. Plus, a financial market that's not got an appetite for it. And a large chunk of the small companies, who have one or a few small fields and are just too risky for attracting investment. This has hindered unlocking of some of these discoveries for development.
WO: Why would the UK government insist on maintaining that extra tax?
YT: Unfortunately, the oil and gas sector, as a whole, is perceived as making huge tons of money. Especially in the UK, the industry has been particularly lax in self-publicizing what we do, including the hard times. So, the media have never understood the hard times. They only see the good times.
The public is only aware of the high oil price, because it hits them at the pumps. But, the Ukraine crisis, with the changing gas price, has now hit them in the home, as well. And that, perhaps, created a backlash. But there was no backlash, post 2016, when oil and gas companies were losing money. There was no support when companies were losing money. And now that companies are trying to repay debt with the high revenues received from oil and gas, it’s been a challenge. I don't know what it's like elsewhere in the world, but the UK media report—particularly the British based companies—the global profits without any context.
They're not providing the context, even in the local news here. I've mentioned it to colleagues and friends, and I'd say that it doesn't it the case. And we need fair media coverage to educate people to the fact that domestic production can be lower-emission than cheap imports, the value that it creates through taxes, and the jobs it creates. But, that mentality is not there.
WO: Given all that, where do you see things headed?
YT: I think the big companies, who have the hubs with longevity, have enough time to wait out this issue. And wait out the EPL to have investment, to postpone investment until that tax rate drops. It's a real challenge because I'm optimistic—I've been in this industry for 30 years now—that we always find a way to get through the challenges and make good, however bleak it is. But the challenge is that there is more competition offered, more global and other energy area opportunities for the supply chain to branch into. That these fields might not be sitting around by the time the companies decide they want to maybe develop them.
And we also need investment now to keep those hubs going, before there's this huge ramp-up in wind expenditure and very ambitious wind targets. Realistically, I don't think anybody attending this event would actually say, “yeah, we're on course to deliver that.” The general feeling is we're not likely to deliver it. Therefore, that expenditure curve is going to slip to the right. And what do we do in the meantime, if we've just chopped off our nose to spite our face by not investing in the oil and gas industry and maintaining what industry we have here.
We have a situation, where the rig count in the UK is going down, and companies are are sending rigs elsewhere in the world, because there's greater opportunity, and greater longevity of business. And once they've gone, they're not going to come back without having to pay a lot more for them. If that happens, then it further challenges those unlocked resources to keep the hubs going. And if they can’t keep going, then we have greater decommissioning. We're looking at between 2,500 and 3000 wells that could be abandoned by 2035, 2040, and we may not have the resources to do that. So, how much will decommissioning cost? It is a challenge indeed.
We will find a way; they always do find a way. I just feel that there's more out there that you cannot expect, because there is too much uncertainty.
WO: So, what you're saying is that at the same time that governments and companies are not maintaining enough investment in the oil and gas projects, they're also not on target to deliver the wind performance that they're projecting or hoping for. Is that correct?
YT: Yeah, and that's a very global problem. And in the UK wind sector, the time between. license award and starting up operations is at least ten years. Bureaucracy in the UK is a challenge in all areas. And wind is no exception to that.
There are other challenges that even if the wind sector can create the supply, there are challenges for the grid to receive the supply. That's been the case in Norway, where they have a very different environment. The operating fields that have laid powerful offshore cables are now creating a drain on domestic electrical supplies, driving up costs for the householder. Again, not ideal.
There are a lot of challenges, but there are many opportunities, if the right companies have the right appetite to invest.
WO: The Sunak administration certainly made a big deal out of the latest round of leases.
YT: Yes, they did. And to be fair, some analysis that we've done shows that in the acreage that's been applied for, there are 84 discoveries. Again, there could be opportunities, but it takes time for companies to be awarded the licenses to study the acreage, plus determine the sites to drill or appraise the acreage. Then, one has to proceed with the economic development of it. And then you're looking at tying back to host infrastructure, which is a potentially rapidly declining picture in just ten years’ time. So, I would say the cycle time in the UK is a lot worse than in the U.S. or some other regions. But, they can do it.
WO: Ah, but will they?
YT: If they don't invest, will we lose a lot of the infrastructure by 2035? Will that be gone and, therefore, we lose accessibility for future discoveries, just to maintain even a small level of production?
WO: What can you tell us about renewables?
YT: It's an uncertain world, yet it's nothing but a good thing to offer a renewable alternative to oil and gas. If it can be made to operate in the long term, at very low cost, that will be the key, because ultimately, global supply will always follow demand, which is increasing in China, India, etc. And as that demand increases, these countries are even more reliant on cheap, affordable energy. One would argue what the appetite is, but affordability will win over sustainability in certain regions of the world.
