Oil & Gas UK Activity Survey 2016

Figure 3: Brent Futures Curves Reflect Shift in Price Expectations

1

120

2

100

80

3

60

4

40

Brent Futures ($/bbl)

End 2013 End 2014 End 2015 Feb 2016

20

5

0

2014

2015

2016

2017

2018

2019

2020

Source: Intercontinental Exchange

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The impact of the abrupt correction in oil and gas prices in 2014-16 on the UK upstream sector is difficult to over-state. It may in future come to match that seen in the years immediately after the price collapse in 1986, although the market circumstances are quite different today. The recent sharp contraction in operators’ cash flow has prompted accelerated reduction of controllable costs, contract renegotiation, cuts in discretionary operating and capital expenditure and, in some cases, a strategic review of operations. Brent (or more accurately Brent, Forties, Oseberg and Ekofisk – BFOE) may be the benchmark used to price half the world’s internationally traded oil but all North Sea producers are price-takers in a competitive global market; their only possible response is to seek to cut their controllable costs in an effort to maintain their cash flow, profitability and competitive position. Natural Gas While oil prices are set in a global market, gas markets are still essentially regional in nature. Prices in the UK NBP hub market, like those on the adjacent Dutch TTF hub market, declined in 2015, but much less dramatically than those of oil. The annual average month ahead NBP price was 42.6 p/therm ($6.50/million British Thermal Units (m BTU)), down only 17 per cent from 51.0 p/therm ($8.40/m BTU). Annual Brent prices, by contrast, fell 47 per cent in 2015. The revenue impact of lower prices in 2015 was therefore highly differentiated between oil and gas producers on the UKCS. Even as oil prices dropped to 12-year lows in early 2016, prompt gas prices of 30 p/therm were still well above the range of 20-25 p/therm witnessed as recently as 2009-10.

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