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Idle North Sea oil rigs point to fresh crisis

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Via Financial Times

Off the coast of the Scottish town of Invergordon, 25 miles north of Inverness, ghostly silhouettes of idle oil rigs dominate the horizon. 

The Cromarty Firth, a sheltered stretch of water leading out to the North Sea, became a barometer of the health of the UK’s oil and gas industry after the last oil price crash of 2014, when it turned into something of a rig graveyard. 

Now the number of rigs stored in the Cromarty Firth is again on the rise as the North Sea battles a dual crisis, the extent of which industry veterans admit they have never seen before. A global slump in oil demand because of the coronavirus pandemic has been compounded by a price war between Russia and Saudi Arabia.

Sixteen idle rigs are in the Cromarty Firth, surpassing the average of 12 recorded in 2016 when the last crisis reached a nadir. Of those, nine still have a small crew on board ready to be deployed if work arises but seven are unlikely to be leaving any time soon. The Port of Cromarty Firth is in negotiations with operators about potentially storing a further five.

Other Scottish ports with strong links to the oil industry, such as Dundee, are also storing rigs.

“I hate to say it but the whole of the North Sea has gone into meltdown again,” said Bob Buskie, chief executive of the Port of Cromarty Firth. “Once the price drops to where it is now . . . basically the place just goes into shutdown.”

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Although record cuts to global oil supply were struck last weekend between the Opec group of producing nations and Russia, crude prices are still languishing below $30 a barrel, spelling trouble for more mature, marginal basins such as the North Sea.

“We are heading into a crisis behind a crisis,” said Jake Molloy regional organiser for the RMT union in Aberdeen, which estimates that as many as 1,500 North Sea workers are going through a redundancy consultation process, as drilling contractors’ work has dropped off sharply.

In 2014, 41,300 people were directly employed by the UK’s offshore oil and gas industry but this fell to 35,600 in 2016. By 2018, employment figures had improved to 36,800 but unions are fearful this latest crisis could take a similarly heavy toll.

“Once the health crisis is over we are into a massive industrial crisis here as well,” Mr Molloy said, as oil and gas companies move quickly to slash capital expenditure.

OGUK, a trade body for the North Sea, expected operators to cut capital investment by up to 30 per cent this year to £4bn-£4.5bn as their revenues slumped. It believed North Sea operators’ cash flows could turn negative this year for only the third time in four decades.

Drilling, which is often among the first activities to be postponed or shelved, is set to fall by more than a third to record lows, according to OGUK, while more mature fields could be decommissioned early. Operators that had intended to take final investment decisions this year on significant new developments are expected to postpone. 

North Sea operators are likely to cut investment this year

As many as 12 new projects were tipped to receive the go-ahead from investors in 2020. Siccar Point, a company backed by private equity group Blackstone, and Royal Dutch Shell have delayed until next year a decision on whether to proceed with one of the most eagerly anticipated new schemes — the Cambo field 125km north-west of the Shetland Islands.

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Independent oil producer EnQuest last month decided not to restart production at two mature North Sea fields that had been temporarily shut for repairs.

Ultimately, industry veterans said the latest crisis could mean some oil and gas reserves are simply never recovered from the half-a-century-old basin.

Even before the coronavirus pandemic, questions were being asked about whether the continued existence of the North Sea oil and gas industry was compatible with the UK’s target to reduce greenhouse gas emissions to net zero by 2050 and whether investors and banks, which are adopting increasingly stringent environmental policies, would continue to support operators in the region. 

The industry’s regulator, the Oil and Gas Authority, had estimated in 2018 that 10bn-20bn barrels of oil equivalent could still be recovered from the North Sea but Alex Kemp, professor of petroleum economics at Aberdeen University, warned activity levels in the basin were “very sensitive to changes in oil prices”.

He last year estimated that at oil prices of $50 a barrel, 8.7bn barrels of oil equivalent could economically be recovered by 2050. He planned to publish research on the latest crisis in coming weeks but said: “I’m expecting that when we put in $30 and $40 in real terms [into our model] . . . it [the forecast] will be on the low side.”

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