The Risk Premium

As oil and gas prices continue to improve, and cash flows change from red to black, companies will begin to think about new activity. However, this will be undertaken at no significant pace, as the fear will exist for some considerable time that prices could turn south overnight. This is the risk premium that OPEC have been keen to deliver to the market to undermine the confidence built up until late 2014 amongst the higher cost producers, particularly US light tight oil.

The decline in light tight oil production has been much slower than most people imagined, due to a variety of factors including a backlog of drilled but uncompleted wells, efficiency gains, cheap recompletions, export infrastructure finally catching up with drilling and significant oil price hedges being in place for many companies. No doubt the opposite will also be true and investment in light tight oil and production growth will be slower than expected as the oil price improves. Indeed this industry cannot fund growth from cash flow alone and requires access to the capital markets which are pretty much closed for new oil and gas investments at the present time. Any new investment will need to show positive economics on the downside case, making sure that P90 volumes and a downside oil price are covered. The ability to mitigate downside oil price risk by hedging at significantly higher prices will be long past. This will severely limit the number of new projects that get sanctioned until market confidence allows the downside oil price assumption to creep up. This will all take time.

The world oil stock build may at last be starting to decline, and as stocks of stored oil start to diminish and with no rush to sanction any new activity, we will gradually build the momentum for the next wave that will run through the business. As ever make sure you are prepared for it, ride it when it arrives and don’t think it will last forever.

The UKCS 29th Licensing Round is expected to be announced soon and the phone has been remarkably quiet regarding offers to join bidding groups. Either I have few friends left in the industry, or there are only a few companies actively looking to bid on the available acreage. It’s probably the former as many of my peers have decided to hang up their boots rather than see through this current downturn. Many retirees wish to retain the various friendships they have developed over the years in the industry and the PESGB needs to assist in this, if it is to retain these members. On this front we will be looking to improve our offering, as well as looking at providing discounted rates for our retired members. Similarly it is important that we provide low cost networking and training opportunities for our unemployed members and we are also reviewing our offering on this front. The Society is keen to retain and assist these members and we welcome any feedback on the best way to achieve this.

In the 2016 Budget the Chancellor announced a further £20 million for new seismic on the UKCS. Two surveys are planned. The first will cover the Celtic Sea and the Western English Channel, the Bristol Channel, the St. George’s Channel and the Irish Sea and the second the East Shetland Platform, including the East Orkney Basin, East Fair Isle Basin and Dutch Bank Basin. OGA issued an invitation to tender for this work in April and acquisition of this new 2D data is planned for 2016. In addition reprocessing of legacy data will also be undertaken with all the new and reprocessed data available free to industry in April 2017.

This year we will be holding PETEX from 15th to 17th November at ExCeL. Due to the current industry climate the main challenge for PETEX has been securing sponsorship. I realise funds throughout the industry are very tight, but do please think about providing some support to this flagship event if you possibly can.

Still summer is here and if you are taking time out from work then now is the best time to enjoy it.