Reflections on Offshore Europe – Thoughts from the outside looking in

GenoaBlackDog

Last week the Genoa Black team had a fantastic few days at Offshore Europe in Aberdeen. Our Commercial Director, Alan Kinloch, reflected on his experience and his thoughts about the Oil and Gas industry to give us his take on #OE17... 

"Last week I visited ‘Offshore Europe’, the 3rd largest oil and gas event in the world, behind Offshore Technology Conference (OTC) in America and Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC) in the Middle East.

Held in Aberdeen every two years it sees 1000+ companies exhibiting to 50,000 visitors over four days, their skills, products, services or new technology, specific to their specialism within the oil and gas industry.

I have attended many such industry events in my career but this is my first in this fascinating sector, leading to what I think are some though provoking observations.

THE UPSIDE: INNOVATION & OPTIMISM

This is a seriously diverse industry with spectacular technological innovation being developed.

Despite press commentary over recent months, to the contrary there is tremendous positivity and longevity for this industry driven by the people leading from the front.

Yes, the drop in the oil price resulted in knee jerk reactions which affected employment numbers, salary levels, supply chain implications & profits and, of course, tax income to the UK Government.

The artificially manipulated price per barrel latterly, at $100+per barrel, had created super profits against capital & operational extraction costs of circa $52 per barrel (2015).

Decades of super profit led to staggering inefficiencies as speed and continuity of extraction took precedence over innovation, efficiency and, dare I say it, ‘good business practice’. 

For too long there was simply no incentive to innovate, as profit was easy and continual. 

The lack of competitive stimulation caused the industry to sit back, slowly ageing, ambivalent to the threats that were emerging. This is not unusual - take the banking sector or the board-room experts of Blockbuster, Compac, Kodak and Pan Am.

We cannot change the past, but we what can we do to shape the future?

OIL & GAS IN 2017

What we are seeing now, is a lower $ price per barrel currently: - (Brent Crude USD/bbl $54.01 as 11th Sep 17) which has hit profits across the entire sector from global empires to 3 man SME’s.

However, it’s not really about the headline price per barrel any more. It’s actually about the extraction cost per barrel. North Sea (Brent) extraction in 2015 was $52.50pb; in 2016 per-barrel costs stood at $42.47, and by 2016 Q4, costs were down to $41.66 per barrel.

In early 2017, Shell sold its North Sea interests to Chrysaor who have stated they can extract in the North Sea at $26 per barrel, largely due to implementing innovative technology. 

To put this into perspective, and as the following tables shows, if extraction in the North Sea can be achieved at $26 per barrel this brings the cost of North Sea oil and gas extraction out from a very dark place.

Cost of Producing a Barrel of Oil & Gas

Innovation has arrived and this is pulling down extraction costs. And from what I can see it is being driven wholly by supply chain companies who are looking for a competitive edge through efficiencies in extraction methods, technology and in some instances some seriously impressive and indeed sexy innovation. 

North Sea Oil success per exploration well drilled in 2015 was the highest for ten years, with an estimated £1.35 trillion pound value of oil and gas reserves remaining at todays price of $54 per barrel.

Assuming that an extraction cost of $26 per barrel is repeatable, this, coupled with the efficient new technology which the sector is continually developing, surely this will have positive effect on longevity in the sector through new growth and investment attraction?

THE DOWNSIDE: INNOVATION TAKE UP IS SLOW.. AND FOR GOOD REASON

The reticence of the industry’s main oil extraction companies (ExxonMobil, BP, Shell etc.) to embrace new innovation seems to be one of the key factors stalling the driving of extraction costs down even further.

There is a reluctance to have ‘down time’ to install new equipment even if that equipment is more efficient or will give a better rate of return. And coupled with this, there is a nervousness to embrace new technology and be the first mover. 

Only when new technology is seen to have been used by a rival successfully and once the benefits  have been fully realised, will technology be recognised by others as having then been proven to work. This attitude alone arguably adds 3-7 years to the roll out of new technology. When you understand how quickly other industries embrace new technology, oil and gas is still using flint tools in a digital world.

In Norway there is a law that directs all oil and gas companies operating in this country. If a supply chain company can demonstrate that their product is better, more efficient, greener, safer or cheaper than their competitor then by law this product must be incorporated in the production cycle. The Norwegian Government state that their job is to protect their people and by forcing innovation on the oil and gas companies this benefit is created including more tax income and environmental improvements.

The UK Government’s failure to invest in, and protect, our oil and gas sector is a travesty.

The successive governments of the day have used oil and gas as a political tool adopting a short term attitude for short term political gain. Initially oil and gas income was used to sort the chronic balance of payments following WW2. Then it was used as a power lever to become part of Organisation of the Petroleum Exporting Countries (OPEC).

In the 80’s, oil and gas singularly fueled the financial boom of the decade, where the focus of investment in the UK was London and the South East. Even the UK’s nuclear weapons program was only affordable on the back of oil and gas tax income with Corporation Tax on oil & gas being the largest single sector payer of this tax in the UK.

Looking back, we can see now that oil and gas as an asset has been badly mismanaged.

Worse still for the North Sea/Aberdeen region, oil and gas tax income is not allocated as a North Sea generated tax due to oil and gas companies largely having London based Headquarters. This system counts all revenue as coming from where their accounts are filed, thus corporation tax, PAYE, VAT etc. are treated by HRMC as a City of London industry. (This can been argued to perhaps be deliberate manipulation in the face of 40 years of Independence threats).

With politicians blissfully ignorant of where tax income in London actually comes from and journalists being both lazy and politically motivated to not influence the independence conversation, the lack of credit this sector and region gets for its tax contribution to ‘Brand UK’ is shocking.

PERSPECTIVE ROUND UP

Lets look at some other interesting oil and gas facts taken from last week’s industry media:

  • In 2013 the £4bn Kraken field was the largest industrial investment in the UK and finally came online in June 2017. It will produce as much as 50,000 barrels of oil a day at its peak.
  • In the face of lower oil prices, the industry has reduced unit operating costs by 48 per cent from almost $30 in 2014 to around $16 by the end of 2016.
  • In 2016, just over 330,000 jobs in the UK were delivered through or supported by oil and gas production.

Finally I was taken aback buy a few ‘facts’ given to me by various companies/individuals I spoke to at Offshore Europe:

  • “To date, of all the oil and gas identified in the North Sea only circa 6% has been extracted”
  • “Every single oil field has left more oil behind than has been extracted”
  • “If you lift your head and look around, over 94% of what you see has derivatives of oil within its production cycle & whilst the world moves towards electric vehicles, the oil and gas industry has a coupe of centuries left in it yet”
  • “The new fields ‘West of Shetland’ have three times as much oil and gas as the existing fields in the North Sea”
GB@OE17

The opportunities for the sector are indeed extremely positive and the negatives can be resolved easily. But this needs to start with the Government leading a significant culture shift in the best interests of the North East, the sector and Scotland."

If you enjoyed this opinion piece from Alan, please read more of our thoughts on Offshore Europe and get in touch if you'd like to talk to us - hello@genoablack.com