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Falling oil prices threaten offshore oil and gas industry’s profitability in Britain’s North Sea

If Brent crude, the North Sea benchmark, remains in the $60 to $70 range, at least 85% of British offshore oil and gas resources in the planning stages are at risk of being dropped, according to Wood Mackenzie. That could mean the abandonment of $27 billion worth of planned development and a threat to the jobs of nearly half a million people in Britain who work directly or indirectly in the oil industry, reports the New York Times.

Many older North Sea operations could begin losing money  at current prices,, potentially causing them to be shut down.

Robin Allan, chairman of the independent explorers’ association Brindex, has said it is “almost impossible to make money” with the oil price below $60 a barrel. He told the BBC that companies would be cutting staff and investment in order to save money.

The problem is not exclusive to Britain’s North Sea, but it is especially apparent off the country’s coast where production costs have been on the rise over the past few years. Overall operating costs in British waters increased by 15.5%, to $14 billion in 2013, while the cost of production has been rising about 20% per year.

Rising production costs and falling prices have been putting an extremely tight squeeze on profit margins for many companies in Britain. A third of Britian’s listed oil and gas companies are in danger of running out of working capital and even going bankrupt amid a slump in the value of crude, reports The Telegraph.

Research from financial risk management group Company Watch suggests that 70% of the United Kingdom’s publicly listed oil E&P companies are now unprofitable, racking up losses totaling around $2.8 billion. Company Watch estimates that a third of the 126 quoted oil and gas companies on AIM and the London Stock Exchange are generating no revenues.

Not all doom and gloom

While the prognosis for the oil and gas industry and its employees, are discouraging, some feel that the lower price of crude could be a net benefit for the UK. While major oil exporters like Russia see hits to their GDP, oil importers like the UK may benefit from the price break, reports Russia Today.

“In essence, an oil fall acts like a tax cut for the economy, but a particularly favorable one in the sense that the burden of lost revenue is primarily borne by the major oil producers such as the OPEC member countries and Russia,” said John Hawksworth, chief economist for PriceWaterhousCoopers. “[The UK is] now a net oil importer, so there should be a net benefit to our economy as a whole, even if there are some losers in the UK oil and gas sector,” he said.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.