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The Challenges of the UK Oil Sector

With the future of the North Sea oil sector looking unsettled, company closures are likely to have a knock-on effect on other companies in the region. Cost saving initiatives, such as joint ventures and the sharing of ’best practices' are being mooted as alternatives to mass redundancy. The UK oil and gas sector continues to hold great significance for the industry, and extracting its potential relies on a proactive approach to changing and challenging market conditions.

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After a long, hard summer it looks like we could be in for a winter of discontent. In the last week we’ve had a report from the Oil and Gas Authority showing that 5500 front line jobs with a further 30,000 from the supply chain have gone from the UK sector since 2014, news that a leading British offshore oil platform builder might be frozen out of the shortlist for a major contract in the North Sea and threats of strike action.

The head of OGA Andy Samuel who is charge of reviving the sector said unless companies work together to become more efficient there is a “serious and urgent risk” of the North Sea oil sector being abandoned. Samuel talked of a “domino effect”, where one company shuts up in an area of the North Sea, forcing other companies in the region to close as well because of an inability to meet the higher cost of maintaining infrastructure. It’s refreshing to note that Samuels’ Call to Action report focuses companies’ minds on considering alternatives to redundancies and ensure that capability is retained for the future.

Experts are clear that current behaviour must change. The UK Government has introduced a suite of tax breaks but urges companies to develop a joined up approach. Wood Mackenzie’s Eric Moffat told the Financial Times, “Companies could benefit for example by sharing joint contracts for supply vessels, or by sharing data on where they are and are not finding oil. But that isn’t something we’re seeing at the moment.”

Oil & Gas UK’s outlook going forward is pessimistic, sang it was clear further jobs are at risk. Chief Executive Deirdre Mitchell said, “This great industry of ours is facing very challenging times. Last year more was spent than earned from production. This is not sustainable and investors are hard pressed to commit investment here because of cash constraints.”

She predicts that with exploration falling to its lowest levels since the 1970s, capital investment – which currently stands at £14.8bn (2014) – will fall by up to £4bn in each of the next three years.

With cuts everywhere you look, there was considerable anticipation about Chevron’s investment in the Culzean project but that has turned sour for the Tyneside platform builders OGN who had hoped to be in with a solid chance to win the contract. The OGN chairman has now warned up to 3.000 more jobs are at risk across not only the firm Wallsend yard but also the wider supply chain. “We run out of work in October,” said Denis Clark, “and yet we have been excluded from the final bidding for the Chevron work, despite having recently completed a recent project on time for Chevron’s Alder project.”

It is a double blow to the company to lose out on a UK contract as it also failed to get the nod for the Maersk Oil Culzean installation and as a result made 200 people redundant. The deal in the end went to companies in Singapore and the Netherlands. The Captain development is thought to be going towards companies based in the Netherlands, Spain or Italy. It is thought to be worth around £200m and could guarantee work for as many as 2000 people.

It’s not only companies being asked to work differently. There are negotiations ongoing between the Offshore Contractors Association and Unite over plans to change the current working pattern on offshore rigs from two weeks on, two off to a three on, three off pattern. An initial offer cuts costs and freezes pay and holiday levels but increases holiday pay, double standby pay and increases sick pay. GMB members accepted it but the larger of the two unions Unite rejected it and the possibility of a strike looms. OCA argue the deal is fair but Unite say members who rejected it two to one in the vote said they had concerns over the impact on workplace health and safety, and quality of life.

No-one is immune to what is going on in the industry right now. It’s been said that the greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic. The OGA thinks there are up to 23 billion barrels of oil and gas underneath the North Sea. If industry doesn’t evolve, it might just stay there.