The North Sea can survive in the short-term as the coronavirus pandemic and collapse in OPEC+ production restraint has seen Brent reach its lowest point since 2003, according to Neivan Boroujerdi, principal analyst in Wood Mackenzie’s North Sea upstream team on Monday.
In the report titled; Can the North Sea Survive the Price Rout?" Boroujerdi explained that based on cost reductions achieved during the last downturn, 95% of onstream production is ‘in the money’ at US$30 per barrel.
However, he warned that close to a quarter of fields would run at a loss in this price environment.
“The major concern here is not volumes. Early shut-ins would accelerate US$20 billion in decommissioning spend," he cautioned.
Boroujerdi said the oil industry’s quickest win to ensure a sustainable future is in reducing operational expenditure.
He claimed that annual investment in the U.K. could fall below $1 billion as early as 2024.
However, he declared that over the longer term, investment is required to increase production and reduce unit costs.
“If the industry goes into harvest mode, a premature end is inevitable. Most FIDs [Final Investment Decisions] for 2020 are off the table. At current prices, nearly two-thirds of development spend could be wiped from our forecast over the next five years," he explained.
He views the threat of stranded assets as real. "We estimate nearly 6 billion barrels of economically viable resources could be left in the ground, not to mention a further 11 billion of contingent resources," he said.
Nonetheless, he says that all is not lost, yet.
“Short-cycle, strategic tie-backs are still likely to go ahead. About 3 billion of the 6 billion barrels of economically viable resources breakeven below US$50 per barrel, further cost reductions or a price recovery could quickly make them viable again," he said.
The expert added that major cost reductions from the service sector are unlikely but demand for services would undoubtedly fall, and the supply chain may take the opportunity - or be forced - to reduce its footprint.
He said there is no guarantee costs will be lower in the future.
"E&Ps [Exploration and Production] will need to revisit development plans to achieve material reductions. And the traditional North Sea players may not be willing investors,” he said.
He added, “the majors will defer capital elsewhere and the sector's independents will struggle financially, particularly if banks look to decarbonize their portfolios.”
The picture in Norway, though is not quite as bleak, as he explained that over 60% of investment comes from locally-focused players with strong balance sheets.
However "a recent wave of FIDs means Norway plc needs a Brent price of US$40 per barrel to avoid negative cash flow for the first time in over a decade,” he advised.
This comes at a time when there is public pressure to move towards more a 'greener' energy mix, and with not much possibility of governments easing fiscal terms.
“Long term, the energy transition needs to accelerate but there’s a risk of short-term stagnation. For the companies that survive, they will need to adapt to a greener future," he said.
By Murat Temizer