Investment in oil, gas projects shrinking
Despite cost cutting, investment in oil and gas projects is dwindling down. Inflows into oil and gas projects in 2016 are expected to be less than £1 billion as against the annual average of £8 billion during the past five years. If oil price continues to hover at $30 per barrel throughout 2016, this will put more pressure on operating margins.
Oil and Gas UK, an industry body, observes that the exploration activity remains at an all-time low. The oil and gas industry body sees no signs of recovery in the present bleak situation as firms are suffering from operating losses.
Quoting a latest survey, BBC reports that oil and gas sector needs efficiency enhancement. The industry should focus on reduction in operation costs and increasing production. Success per exploration well drilled during 2015 was at its best in 10 years.
Oil and Gas UK has alerted that if oil price continues to be at $30 per barrel this year, 40 percent of UK Continental Shelf (UKCS) oil fields will suffer more operating losses. This will impact further exploration activity and dampen inflows of investment. The UK basin will then have to compete in the global market for attracting price-constrained capital.
Another concern area for oil and gas industry is debt burden. The drop in oil prices is giving jitters to a whopping borrowing level of $88 billion. About 30 percent of debt is estimated to be at distressed level resulting in more financial and operating losses for oil companies. Mostly US shale producers borrowed heavily. Low oil price coupled with high cost of production is taking a toll on margins, according to The Guardian.
Deirdre Michie, Chief Executive, Oil and Gas UK, said "The UKCS is entering a phase of super maturity."
"Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here," said Michie. Analysts call for a coherent approach among the oil and gas industry, regulator and government for strengthening competitiveness and investors' confidence.
International Energy Agency (IEA) in its medium-term report sees rebalancing in global oil market by 2017. However, falling investments will pose supply security risks. Once the market starts rebalancing, oil price may rise gradually. IEA estimates 4.1 million barrels per day adding to global oil supply during 2015-2021.
Several oil fields are closing down their production activity owing to lower prices and sluggish demand. It's estimated that the number of oil fields that may shut production during 2015-2020 rose by one-fifth to over 100. Oil price fell from $115 per barrel in July 2014 to about $30 a barrel now.