Can the UK oil & gas industry find opportunities in adversity?

Published at 00:19 AM on 11 February 2015

  • UK oil and gas industry faces risk of an economic triple whammy
  • Sustainable cost reduction strategy can make them fit for $50… and the future
  • Biggest challenge is to halt knee jerk panic, turning negatives into positives for the long term benefit of the wider industry

According to a new PwC report, the 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. 

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. 

PwC 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 languor, taking steps now to deploy a fresh strategy that will help secure the future of the UK Continental Shelf (UKCS).

However, to do this effectively, businesses need to get away from the short term knee-jerk reactions it has applied in previous down turns - or risk damaging the long term future of the industry.

Brian Campbell, oil and gas capital projects director at PwC 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.

“But it’s not too late to glean some good out of adversity and for businesses to work together to create their own new dawn for the North Sea. There are a series of levers business leaders can pull, which, as we’ve seen in the past, can lead to long term sustained efficiencies and opportunities for their business and the wider industry.”

 Fit for the future

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.

The report outlines a number of tactics industry should consider including:  reducing costs in a sustainable manner; managing cash; leveraging contracts to work in the new environment; understanding tax and how it might help during this period; and making hard decisions around strategy and portfolio choices.

But the biggest challenge of all will be turning some of the negatives into the positives that will benefit the wider industry in the longer term.

As a result, 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.

Kevin Reynard, office senior partner at PwC in 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.”

Ends 

About PwC

PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com


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About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2016 PwC. All rights reserved

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