N. Sea oil companies told to cut costs to ensure survival in $50-barrel market

oil 50 barrelThe UK oil and gas industry would have been in a much better place to weather the oil price maelstrom had it heeded 30-40% cost reduction warnings 12-18 months ago, according to a new report by business advisors PwC.

But it also states that those who think that there is little point locking the stable door after the horse has bolted – or who have simply reacted with cost cuts – should think again. 

Kevin Reynard, Senior Partner at PwC, Aberdeen, commented: “Viewing lower oil prices as a catalyst for driving change may not be a bad starting point, particularly if we look for the opportunities in the current adversity for operators in the North Sea and further afield.

“Firms could start by defining the future shape of the company and what needs to be transformed to get there.

“We recognise this may be a much more complex and challenging path. But only by approaching transformation from that vision can we escape short term knee jerk reactions that could wipe out knowledge banks and turn-off suppliers for example, actions which could ultimately damage future business growth and the viability of the wider industry.

“Ultimately if we are sensible about the changes needed, businesses, as well as the oil and gas sector, will be much leaner and more efficient …and crucially for our UKCS, fit for the future.”

PwC’s energy specialists believe that despite the real and present danger of an economic triple-whammy, there is still time to learn the harsh lessons of past langour, taking steps now to deploy a fresh strategy that will help secure the future of the North Sea energy industry.

Brian Campbell, PwC’s oil and gas capital projects director  and co-author of the report, said: “With economists predicting low oil prices throughout 2015, UK oil and gas firms are not out of the woods by any means.

“They are still at risk of an economic triple-whammy: as the falling oil price reduces income, incremental investment may no longer be economic with a risk that field life diminishes and decommissioning is accelerated.

“The stark reality is that firms need to be able to operate in an environment where oil averages at $50 per barrel – only then can it be truly fit for the future.

“We’ve been talking about cost reduction and restructuring within the industry for several years now and the harsh truth is that if many larger exploration and production and oil field services firms had implemented programmes before the oil price crisis hit, then the industry would be in a much better place to weather the storm that is currently raging.”

The report states that although the industry is in a painful period, with the depressed oil price being sustained for longer than expected, there are still long term opportunities for the industry and individual businesses.

Many businesses will need to completely transform the way they operate to grasp the opportunities that lie ahead in 2015 and beyond.  According to PwC’s energy team, the opportunities available to them include:

  • Re-evaluating the shape of the business and developing a revised business model and strategy
  • Embracing technology and innovation to meet changing needs
  • Maximising the potential of asset portfolios based on long-term objectives
  • Divesting of non-core parts the business; and
  • Identifying and investing in strategic acquisitions to secure market position in a key area.

Meanwhile, global oil services giant Halliburton is reducing its workforce by 8%  and Tullow Oil has scrapped its dividend after reporting its first loss in 15 years because of the 50% fall in crude oil prices since last summer.

Commenting on the Tullow results, Lewis Sturdy, a dealer at LCG, said: “Tullow turned in a huge annual after writing-off projects not profitable thanks to the fall in oil prices.

“Investors were not expecting it to be pretty reading, with a share price down around 50% over the last year. Having found a level since around December, long suffering shareholders will be hoping to have found the bottom of the well – with the scrapping of the final dividend topping off the bad news.”

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