Experts forecast ‘cautious optimism’ over 2018 Brent crude oil price at around $60-barrel – but N. Sea production still forecast to fall from 2020 onwards

The price of Brent crude oil has started 2018 at a three year high at around $67-barrel and market analysts are cautiously forecasting an average price for the year of around $60-barrel.

However, this rise in value will likely be used to bolster Big Oil balance sheets rather than sparking a rush to drill new North Sea oil wells.

Sanjeev Bahl, analyst at Edison Investment Research, explained: “With restrictive monetary policy which curbs global output and oil demand growth, investors will have to remain selective, stress testing opportunities in the event of an oil price correction.

“2017 was a year of transition for oil markets. OPEC acted cohesively, with Russia and 10 non-member producers reducing supply and drawing down inflated crude inventories. By the end of 2017 excess oil in OECD industry stocks had fallen from 300mmbo to c 110mmbo relative to the five-year average, driving a 22% increase in Brent.

“Oil prices are likely to remain a key driver of sector performance in 2018. With Brent trading above $67- barrel, it is likely that the financially and operationally leveraged small/mid-cap E&P sector will see the lion’s share of gains in 1Q18.

“However, the sustainability of the recent rally in crude is likely to come into question as prompt price strength, and a shift in term structure from contango to backwardation tests US shale oil price elasticity. The IEA currently estimates US shale growth of 870kbod in 2018, which would lead supply growth to exceed demand growth in the first half of this year, based on the agency’s forecasts.

“Indeed, it is uncertain whether higher oil prices and resultant cash generation would lead to an increase in organic investment across the E&P sector as financially leveraged stocks are put under pressure to reduce their debt burden and shareholders demand capital constraint and greater distributions.

“Nevertheless, we expect to see an increase in capital available for organic growth opportunities that can take advantage of a lag in oilfield service pricing and which offer a high risked return on a $50-$60-barrel oil long-term planning assumption.

“Our outlook for 2018 is of cautious optimism. OPEC has acted successfully to reduce the inventory overhang and demand growth remains robust in the short term, notwithstanding welcome advancements in fuel efficiency and vehicle electrification.

“A stable oil price above $60-barrel is likely to be viewed as ‘light at the end of the tunnel’ by many E&P management teams, shifting the focus from debt obligations and covenants to distributions and growth.

“There is potential for oil prices to move higher as inventories normalise, with the market reverting to pricing in a supply risk premium to reflect the probability of disruption – this was apparent in early 2018 with disruptions to the North Sea Forties pipeline and unrest in Iran.”

In its outlook for 2018, Wood Mackenzie expects to see (only) 15 new exploratory wells, with “all eyes west of Shetland”, and with Oil Minnows more active than Oil Majors.

The Edinburgh-based energy consultancy is more upbeat about overall N. Sea production, expected to rise to 1.9 million barrels per day as the big new west of Shetland developments – Clair Ridge and Mariner – come on stream.

These will be the last of the big projects which were green-lighted in the 2010 to 2014 boom, says WoodMac. It should take UK production this year to the highest point since 2010, and up by 25% since 2014.

Development spending, to extend the lives of oil and gas fields for instance, looks more downbeat. Estimated at $6.2 billion, that would be 20% down on 2017 and the lowest level since 2000.

Wood Mackenzie also say there could be up to 14 new wells  given the green light for investment, but these won’t be enough to halt the accelerating decline in production from onstream fields.

So while a $60-barrel crude oil price may help these projects get through the final investment gateway, they will not prevent the North Sea oil and gas industry returning to a decline in production from 2020-onwards.

Oil economics apart, Brexit also poses a huge threat to the Scottish oil and gas industry.

It is estimated that 40% of all employment supported in the UK by the oil and gas industry is located in Scotland – around 150,000 jobs in Scotland.

Many of these are the kind of high-skill, high level jobs that employers cannot fill in Scotland and they are forced to recruit from the EU.

While EU nationals currently enjoy an unrestricted right to live and work in Scotland (and England) – this will be removed from 1 April next year when Britain becomes Independent from the EU-bloc.

The Scottish Affairs Committee of Westminster MPs will take evidence on Brexit-job threats to the North Sea oil and gas industry next week.

 

12 Jan 2018

 

 

 

 

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