The combination of the global economic impact of the continued spread of the coronavirus, the most dramatic fall in oil price in almost 30 years and a halving of gas prices is driving an increasingly fragile outlook for the UK’s offshore oil and gas sector. Severe pressures are already building across the sector’s supply chain, with the pressures expected to significantly undermine the industry’s businesses, jobs and contribution to the economy.
The stark warning was made today by the leading representative body for the sector OGUK, in the first in a series of Business Outlook reports which will shine a light on the issues facing the sector in a challenging and dynamic business environment.
The Business Outlook: Markets and Investment report shows OGUK now expects drilling levels to fall back to the lows experienced in 2016, down more than a third on previous forecasts. The report also warns of a possible 20-30 percent decrease in capital investment for 2020 as well as the potential that the operators in the sector will experience negative cash flow this year.
While the industry was only beginning to emerge from one of the most prolonged and severe downturns in its’ history, OGUK said the supply chain had remained under significant pressure, with tight margins and relatively low activity levels.
OGUK today called for government support to ensure the sector can continue to provide security of supply in the face of these extraordinary difficulties. The body also said it was working with industry, regulators and government to understand how it can protect supply chain companies, and jobs.
OGUK Chief Executive Deirdre Michie said:
“Businesses and industries across the UK are facing extraordinary pressures but coming so soon after one of the worst downturns in our history, this report shows that this sector is now in a paper-thin position.
“The offshore oil and gas sector is part of the UK’s critical infrastructure, providing the secure and affordable energy the country needs and is a key contributor to the economy in terms of supporting hundreds of thousands of skilled jobs, businesses and our wider economic contribution.
“Action is needed now to ensure the sector doesn’t lose the skills, experience and infrastructure it needs to meet the UK’s energy needs of today as well as help deliver its net zero ambitions in future. We appreciate the Chancellors recent statement and OGUK is requesting urgent meetings with ministers to consider a COVID-19 Sectoral Resilience Package which would help to give some reassurance to the regions, businesses and jobs this industry supports.
“We’re already working with our members to understand the challenges businesses are facing in these unique and extremely worrying times.”
OGUK Market Intelligence Manager Ross Dornan said of the report:
“The first week of March saw the most dramatic fall in oil price in almost 30 years and it remains uncertain as to how the market is going to evolve in the coming months as the coronavirus impact increases each day.
“Alongside this, the gas price has more than halved in the last 12 months, and we face a situation where E&P production revenues are set to be almost 50 percent lower than they were two years ago despite the same level of output.
“The UKCS has seen significant improvement in its competitiveness, efficiency and productivity in recent years. These improvements will help performance, however in this harsh environment we expect companies to take significant steps to preserve cash flow and ensure business continuity. This will have a very negative impact on the supply chain, which has not yet seen much recovery from the previous downturn and doesn’t have the capacity to absorb much more pain.
“Companies are increasingly diversifying into other energy sectors and across industries more generally, but many cannot diversify or are too early in their journey to provide adequate protection/buffer. At this time innovative thinking, partnerships and meaningful collaboration will be required to help as many as possible to weather the storm.”