U.K. Oil Industry Faces Output Drop After Virus Pummels Spending

 

The Esso Fawley Oil Refinery, operated by Exxon Mobil Corp., stands in Fawley, U.K., on Thursday, May 14, 2020. Oils historic plunge below $0 a barrel pummeled portfolios, broke risk models and changed the way the worlds most important commodity is traded. Photographer: Luke MacGregor/Bloomberg , Bloomberg

(Bloomberg) --

The U.K.’s oil and gas industry faces a struggle to recover from an investment slump sparked by the coronavirus and in the longer term will have to manage..

a prolonged decline in output, according to its trade body.

Production may decline further this year and next, following a 5% decrease in 2020, Oil & Gas U.K. said in a report published on Tuesday. That follows a plunge in development and operations spending in the sector, which slumped 23% year-on-year to 11.6 billion pounds (about $16 billion), the lowest since 2004 in real terms.

“Most companies in our industry remain in a fragile state” even as economies start to reopen, OGUK Chief Executive Officer Deirdre Michie said. “This year is likely to remain highly challenging, as companies continue to navigate the operational issues associated with the pandemic” while repairing finances.

U.K. oil producers, which have seen output slump more than 60% in the past two decades as fields have aged, took another big hit from the pandemic. Only seven exploration wells were drilled last year, the least since 1965, according to OGUK, and thousands of jobs were lost.

The sector is also under increasing pressure as the government seeks to move the country away from dependence on fossil fuels. Ministers are even considering an end to issuing new oil exploration licenses in the North Sea in 2040, the Telegraph reported at the weekend.

The U.K. industry “is leading the way on green technologies” and any licensing constraints would only increase volumes of imported fuel, OGUK said Monday. The country’s own gas and crude production -- 1.61 million barrels of oil equivalent a day last year -- covers about 70% of needs, its data show.

Longer-Term Decline

OGUK sees an output decline of between 5% and 7% a year in 2021 and 2022 due to the drop in spending, as well as an increase in planned maintenance outages deferred from 2020. The basin needs “a steady stream of investment in new fields,” according to the report.

There is a chance for “stabilization” in volumes toward the middle of the decade, but “overall we are in for a period of longer-term decline,” Ross Dornan, market intelligence manager at OGUK, told reporters. Yet, it is important “to manage that decline as effectively as possible,” he said.

There is a range of projects being considered for investment approval in 2021 and 2022 that could unlock 700 million barrels of resources, OGUK said in the report. “But they are contingent on greater market stability and continued regulatory and government support,” it said.

Other takeaways from the report:

. Total expenditure will remain constrained in 2021, OGUK said, estimating this year’s figure at between 11.4 billion and 12.4 billion pounds.

. It expects 70–80 development wells in the U.K. Continental shelf in 2021, with 10–12 exploration wells and three-to-five appraisal wells -- similar to levels seen in 2016–18. Last year’s result: 62 development wells, the lowest activity since 1976; seven exploration wells the lowest since 1965 and two appraisal wells, the lowest since 1970.

. OGUK also sees a pick-up in decommissioning, adding that companies may look to advance some existing plans that may have been deferred to 2022–23 given improved commodity prices.

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