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Drillers Can Return to Fighting Slump After Scotland’s ‘No’ Vote

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September 19, 2014

Cormorant Alpha platform in the UKNS, Image courtesy TAQA

By Tony Barrett and Nidaa Bakhsh

Sept. 19 (Bloomberg) — U.K. oil companies can stop fretting about Scottish independence and go back to combating a slump in output that’s the steepest of any major producer.

Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden and BP Plc head Bob Dudley were among those who said before yesterday’s referendum that keeping Britain’s 307-year union was good for the oil industry. Both companies led development of the North Sea in its production heyday during the 1970s and ’80s, when the Scottish National Party first cried the slogan “It’s our oil!”

Output has long since peaked and production collapsed 74 percent from a high in 1999, according to energy analysts at Raymond James. After the vote, the U.K. government will work with oil companies on incentives to invest in mature fields and make it worthwhile to produce from more marginal deposits.

“Shell welcomes the decision by the people of Scotland to remain within the U.K., which reduces the operating uncertainty for businesses based in Scotland,” van Beurden said today in an e-mailed statement. “Shell will continue to work closely with both the U.K. and Scottish governments to help the industry deliver vital energy supplies through investment in the U.K.’s oil and gas resources.”

Referendum Campaign

The Scottish government, claiming almost all the North Sea’s oil under independence, used the referendum campaign to accuse the U.K. of failing to provide stable and predictable stewardship of the resources.

On the flip-side, the U.K. government said the Edinburgh administration relied on optimistic estimates of tax revenue from oil and would have to give up the stability of the pound.

Open questions over Scotland’s use of the British currency and tough negotiations with the U.K. would have risked stalling investment in the North Sea needed to sustain output from the maturing oilfields, Ian Wood, author of a report into the future of the industry cited by both sides of the independence debate, said in an interview before yesterday’s vote.

Shares of oil companies and service providers climbed in London trading today.

Petrofac Ltd., the largest oil and gas engineer, advanced as much as 4.5 percent to 1,096 pence. Enquest Plc, active in the North Sea, gained as much as 3.8 percent to 114.50 pence. BP rose as much as 1.5 percent to 478.20 pence and was at 476 pence as of 9:10 a.m. local time.

Industry Relief

“The industry will give a big sigh of relief as companies are able to move forward with contract obligations with certainty,” Alastair Young, a partner at Bracewell & Giuliani who has worked on energy for a decade and acted for producers from Sinopec to Apache Corp., said in an interview. “They’ll feel comfortable with development of assets and M&A deals.”

That will be essential if operators are to extract the greatest possible value from the fields. While the equivalent of 10 billion barrels of oil are already included in development plans, 40 percent of that has yet to secure investment, Oil & Gas UK said in its Activity Survey for this year. The right conditions for investment in exploration, appraisal and development are crucial, it said in the report.

“Oil & Gas UK looks forward to continuing working closely with both the U.K. and Scottish governments towards the shared ambition of maximising economic recovery of the U.K.’s offshore oil and gas resource,” the industry group said today. “To safeguard the industry’s future, it is particularly important that the government now presses swiftly ahead with fiscal reform.”

Budget Forecast

The Office of Budget Responsibility, an independent body set up to report on public finances, forecast U.K. oil and gas receipts falling to 3.5 billion pounds by 2018-19 from 4.7 billion pounds in 2013-14. While the OBR is more pessimistic than some, actual money raised has often come in below its figures. All six of its budget forecasts that included outlooks for 2013-14 were higher than the outcome.

“Oil and gas has been a fantastic opportunity for the U.K.,” said Wood, who estimates there may be 15 billion to 16.5 billion barrels of oil and gas yet to be recovered. “It’s still got a long way to go but we are up against it. We are now quite mature.”

One uncertainty remaining lies in the promises made by U.K. political leaders over transferring more control, including tax raising powers, to the Scottish government to win over voters.

“We would expect the SNP-led Scottish government to begin to focus on gaining further devolutionary powers,” Investec Plc analysts wrote in a note to investors this month.

–With assistance from Anna Edwards and Eduard Gismatullin in London.

Copyright 2014 Bloomberg.

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