Oil industry eyes recovery from coronavirus downturn

More than half a decade on from a collapse in the price of oil that gutted parts of the UK’s energy industry, explorers in the North Sea hope they can bounce back from another major downturn sparked in part by the coronavirus.

As large parts of the British economy start to reopen, oil producers are still facing a depressed oil price that has already forced majors BP and Shell to slash tens of billions of pounds from how they value their assets.

The price of a barrel of Brent crude oil dropped below 19 US dollars in April because a global economy that was in lockdown needed a lot less oil.

It had already been under pressure as Saudi Arabia and Russia launched a short-lived race to increase their production, which flooded the market with cheap crude.

The price of Brent has now made up some ground, but at about 42 dollars is still a third lower than it was at the start of this year.

But there are big differences between this year’s crash and that six years ago, said Mike Tholen, sustainability director at Oil & Gas UK, the offshore industry’s trade body.

For years after 2014, producers have been tightening their belts by slashing costs that had run away before the crash, setting them up for today’s lower prices.

“Between 2014 and 2019 there was a massive amount of effort to get costs and efficiency back to a place they should have been in,” Mr Tholen said.

However, while demand for oil kept creeping up after 2014 as the global economy was unaffected, producers are facing a very different prospect today.

“Immediate activity, whether it’s drilling activity, or project construction work … is under pressure at the minute.”
Mike Tholen, sustainability director at Oil & Gas UK

Reduced demand is placing very different pressures on the sector, forcing some drillers to put off plans to find more oil and gas.

“Immediate activity, whether it’s drilling activity, or project construction work … is under pressure at the minute,” Mr Tholen said.

But small explorers, looking to start supplying their first fuels in the middle of the decade have been largely unaffected.

“People have been talking about the end of the North Sea for decades,” said Graham Swindells, the chief executive of gas producer Deltic Energy, a partner of Shell.

The company plans to start exploring for gas from fields in the North Sea within a few years.

“There’s no doubt it’s a mature basin, but that doesn’t mean that there isn’t still a huge amount of potential. We certainly believe that there are a significant amount of resources still to be found, otherwise we wouldn’t be doing what we do,” Mr Swindells said.

Andrew Benitz, the chief executive of Jersey Oil and Gas, which is planning to restart production at a site BP abandoned in 2017, said his company is still pushing ahead with plans to start producing in 2025.

“We think that it could be one of the very last bits of new infrastructure to go into this part of the central North Sea,” he said.

His comments touch on the double challenges that have been worrying North Sea watchers years before Covid-19 came – climate targets and dwindling reserves mean production cannot continue forever.

Oil production will need to drop by around a third by the end of this decade for the world to be on track with the Paris Agreement on climate change, said Charlie Kronick at Greenpeace.

It was something the sector got a preview of at the height of the pandemic in April when demand fell by a similar amount.

But any shift away from fossil fuels could trigger big economic problems, especially around the east coast of Scotland.

Ministers only need to look to 2014 to see a taste of what could happen if the industry is allowed to disappear with nothing to take its place.

Aberdeen was packed with sports cars filling their tanks with petrol made from 120-dollars-a-barrel oil until the crash, but the economy rapidly spun into decline when the cost of Brent dipped below 50 dollars.

After Covid-19, and amid the race to meet carbon targets, the downturn could be repeated.

“We’ve got through the most acute part of the medical emergency around Covid-19. Now it’s the economic emergency that’s going to emerge.”
Charlie Kronick, Greenpeace

“We’ve got through the most acute part of the medical emergency around Covid-19. Now it’s the economic emergency that’s going to emerge,” Mr Kronick said.

“Realistically I think anybody who is connected to the North Sea value chain, whether they’re offshore workers, or the people who support offshore workers – which is hundreds of thousands of jobs in the UK – are going to have to seriously think about where their future lies,” he said.

“That is not a good thing … it’s terrible. And I think part of the problem is that we as a country, and certainly the industry, have not planned for this transition that is coming.”

But as Britain still relies on natural gas for around a third of its electricity, and while most cars burn petrol or diesel, the North Sea will continue to produce thousands of more barrels in the years to come.

Even the pandemic did not stop thousands of oil rig workers from pumping fuel back to the mainland to help keep the lights on.

The number of workers labouring offshore dropped from around 12,000 to 7,000 at the height of the crisis, said Trevor Stapleton, health and safety director for Oil & Gas UK. Around 2,000 more workers have now joined the offshore workforce.

“We believe that the offshore workforce is unique, the offshore working environment is unique and our workforce needs to be treated as such.”
Trevor Stapleton, health and safety director for Oil & Gas UK

Staff are now wearing face coverings, perspex screens have been installed in helicopters so that the pilots to take workers to the rigs are separated from their passengers, and anyone who feels unwell has been told to stay onshore.

Now he wants to see testing of offshore workers who are not showing symptoms at their local NHS testing sites.

“We believe that the offshore workforce is unique, the offshore working environment is unique and our workforce needs to be treated as such,” Mr Stapleton said.