UK oil industry expected to survive credit squeeze

Oct. 1, 2007
The UK oil and gas industry likely will survive the credit squeeze in the financial markets, a senior banker said in London, adding that the industry is important and cyclical.

The UK oil and gas industry likely will survive the credit squeeze in the financial markets, a senior banker said in London, adding that the industry is important and cyclical.

Steve Mills, senior director of oil and gas project and export finance at the Royal Bank of Scotland, cautioned that it was still early to judge the full impact of the credit squeeze, but if there is a reduction in capital, people have a “good case to make that the UK has a great record in oil and gas.”

Speaking at a breakfast meeting looking at successful entrants in the UK North Sea, he said, “I feel the banks will ride this comfortably because it is long-term and it’s about regular cash flows.”

As major international oil companies reduce interests in the mature UK North Sea to look for larger fields elsewhere, new entrants are important players in the basin because there is an estimated 20-25 billion boe yet to be produced, said Mills. Since the 1990s, new entrants on the UK Continental Shelf have contributed 40% of the investment and controlled 20% of the production there, according to trade association Oil and Gas UK.

However, new companies require money, assets, and people to build a successful business in the UK North Sea, and smaller entrants have more difficulty raising equity. Debt is available to operators, but small assets reduce senior debt capacity, Mills added, saying that abandonment guarantees erode debt capacity or use it inefficiently. Operators must have field-development plans in place if they are to secure bank capital. Rising costs-a general industry trend-are also a serious challenge, Mills said.

For Mike Wagstaff, chief executive of UK-based Venture Production PLC, which focuses on the UK North Sea, implementing gas projects has become challenging because of low gas prices compared with oil prices. “Cost production is acute,” he said at the seminar. Venture recently tested gas production from its Chiswick gas field in the UK southern North Sea (OGJ Online, Sept. 19, 2007). “To get to the [gas-prone] southern North Sea, we need to do things differently to get costs down. The price of gas in the UK now is not as bad as thought at the New Year, [but] gas is over half of our business, and so we are concerned about it.”

As demand for contractors’ services soars in light of high commodity prices, contractors charge operators more, increasing operational costs. Wagstaff criticized current contractor practices as inefficient, calling for the industry and contractors to “rip up the way they do things.” Nevertheless, “contractors here are not making the margins that they should be,” Wagstaff added. “The net unit cost in the Gulf of Mexico is lower and contractors there make bigger margins.”

Mergers of companies listed on the Alternative Investment Market in London have not occurred as quickly as was anticipated, as they vie to develop projects in the North Sea and raise finance, said Ernst & Young. But Venture Production in August offered to buy Wham Energy PLC because it has gas exploration assets in the UK southern North Sea.

At the seminar Wagstaff said that in a mature and consolidating industry, it is necessary to have size and scale to maximize resources. “I think consolidation will happen to bring down costs,” he added. “I sympathize with AIM companies-it was difficult to access capital in 2004-05, and we’re paying the price for that now. There is a tendency to underprice risk, and [the results] will be painful.”