UK’s Under-Pressure Oil Industry Braces for Election

May 07, 2015 | Latest Featured Articles

By Nick Coleman | –

The May 7 election retains some familiar features, including business backing for the Conservative Party. BP CEO Bob Dudley and his counterpart at independent Tullow Oil, Aidan Heavey, were among UK business chiefs who signed a letter last month saying the outgoing Conservative-led coalition had been “good for business” and “supported investment and job creation.” Changing course would send a “negative message” about the UK, they said.

Prime Minister David Cameron’s opposite number in the Labour Party, Ed Miliband, has touched a nerve by pledging to freeze retail energy prices and restructure energy utilities. Only a handful of North Sea companies would be directly affected, but the threat has resonated widely with its suggestion of an anti-business stance.

Many oil companies have sat on the fence however, mindful that it was Cameron’s government that imposed a 12 percentage point tax hike on the industry in 2011. The move was widely seen as a shake-down; it raised the effective top rate of tax for oil and gas fields approved before 1993 to 81% and those approved later to 62%. The tax rises have been reversed in the last few months. But Anglo-Dutch Shell has remained taciturn on the election, stressing the need for the UK to stay in the EU amid Conservative promises to hold a referendum on the topic.

There is little mistaking the sour mood in the industry. The vote, in which opinion polls have remained finely balanced, comes against a backdrop of depressed oil prices, job cuts and signs of corporate stress. The decline in UK oil production slowed last year to 2.4%, but the trend remained clear, with oil output hitting 847,000 b/d of oil equivalent. A recent survey by lobby group Oil and Gas UK found that sentiment in the industry had fallen to minus 31 on a scale of minus 50 to plus 50.

Shell chief financial officer Simon Henry warned on April 30 that the government had to “move quickly” to make the traditional North Sea producing area more attractive, even as Shell expects to bring some new production on stream next year in the more frontier West of Shetland area.

Similarly, BP chief financial officer Brian Gilvary described the North Sea on April 28 as “a very, very late life province” with all the issues that implied, while noting that BP had increased the reliability of its operations in the North Sea by 6% in the first quarter.

Some optimists exist. The chairman of independent Hurricane Energy, John Hogan, sounded ebullient as he discussed his company’s “fractured basement” discovery west of the Shetland Islands on May 1. This discovery, known as Lancaster and estimated at over 200 million barrels of oil equivalent, could still be viable, “not least as the industry cost base continues to fall,” he said.

Brian Nottage, general manager at consultancy Hannon Westwood, argues that investors are still interested in the North Sea and highlights the creation of a new regulator intended to increase cooperation among companies. Cost inflation could be brought down, he said, arguing that companies had got “very cozy” with high oil prices.

Delayed projects

However, with a number of projects awaiting approval, including Chevron’s West of Shetland Rosebank project and Statoil’s Bressay heavy oil field, uncertainty over the election, particularly the prospect of smaller parties such as the Greens and Scottish Nationalist Party (SNP) sharing power, is causing anxiety.

The SNP has long portrayed itself as a steady hand for the oil industry, reflecting Scotland’s likely dependence on oil and gas were it to leave the UK. But not everybody is reassured, and the rise of the anti-fossil fuel Green Party is not helping.

A senior executive at one oil company said it made little difference if the election produced either a Conservative or a Labour government. But the idea of some of the smaller parties joining in power-sharing agreements was a different matter.

“If it’s a political party that’s hell bent on taking things off the industry — there could be another 50 years of this business, but it could be very easy to break.”

“The country doesn’t have the credibility within the boardrooms of Houston and Calgary and New York or even London, in terms of being able to believe.”

Nick Coleman is of Platts.