Britain’s oil and gas sector needs government help to survive, industry body OGUK said, after the oil price crash triggered by the coronavirus and a Saudi-Russian price war threatens its ability to continue producing hydrocarbons in the North Sea.
EnQuest (ENQ.L) became the first British producer to shut North Sea fields in the wake of the oil price LCOc1 slump to 17-year lows, saying it will not restart its Heather and Thistle/Deveron fields.
For industry as a whole, Britain has already said it would launch a 330 billion pound lifeline of loan guarantees and provide a further 20 billion pounds in tax cuts, grants and other help for businesses facing the risk of collapse.
OGUK Market Intelligence Manager Ross Dornan said it was not clear how OGUK members could access the government funding and it might not be enough to ensure survival for some of them.
“In the longer term, we are also looking for further support from the government in terms of a sector deal,” he said without elaborating on the nature of any such deal.
Dornan added that it was too early to say how much money the industry would need or whether the shift to lower-carbon energy might be an added complication.
Oil and gas companies have already been struggling to attract investors because of the shift away from fossil fuel, including the British government’s aims for net zero carbon emissions by 2050.
The British North Sea, home of the Brent crude stream that underpins global oil prices, is one of the most expensive places to produce oil.
At prices of $40 a barrel and 25 pence per therm for natural gas, the OGUK said it expects its oil and gas producers to “effectively be cash flow neutral”. At $35 a barrel, the basin would fall into a negative cash flow of about 1.2 billion pounds.
Producers worldwide have cut spending and dividends as benchmark oil futures have slid towards what could be their worst quarterly fall since the 1980s.
Some companies might not stay afloat.
“We are likely to see more insolvencies and consolidations in the market,” Dornan said.
The British North Sea produced about 1.7 million barrels of oil equivalent per day last year.
Dornan said that lower activity and investment might ultimately lead to lower output from the North Sea basin, but not immediately.
“I think there is enough hooked-up, sanctioned resource right now to maintain production levels at around the current rates in the next year, 12 to 24 months,” he said.
Maintenance work, including at the Forties Pipeline System central to crude streams underpinning the Brent benchmark, could be subject to change.
“It’s a work in progress, any activities are going to be under review,” he said.