Business Outlook 2020 - Autumn Snapshot

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BUSINESS OUTLOOK 2020: Autumn Snapshot

Contents

Our vision is to ensure the UK Continental Shelf becomes the most attractive mature oil and gas province in the world with which to do business. Read all our industry reports at www.oilandgasuk.co.uk/publica�ons

Foreword

3 4 6 7 8

Oil and Gas Market Update

Industry Sentiment

Production

Drilling Activity

Recovering Investment and Activity Levels

BUSINESS OUTLOOK 2020: Autumn Snapshot

Foreword The full impact of the COVID-19 pandemic on the global economy is unparalleled, with record decline in growth rates and levels of national debt, increasing unemployment and low investor and consumer confidence. The challenges faced by the UK offshore oil and gas sector is one important marker of the extent of this economic shock. OGUK will examine this relationship in more detail in our upcoming Economic Report . While the longer-term economic outlook remains uncertain, it is increasingly clear that any marked recovery in activity and investment on the UKCS will take some time. The effects of the downturn were felt rapidly, with companies having to respond to protect the safety of their workforce and the sustainability of their businesses. This resulted in a fall in expected total expenditure of around 30 per cent this year as companies reduced activity levels. It could take two to three years to restart much of the capital investments that have been lost. This is reflected in the low business sentiment expressed by OGUK members as companies look to 2021. The outlook for next year is determined by a number of factors including ongoing uncertainty over how themarket will develop, the ability to safely increase offshore personnel levels, the extent of cash constraints within E&P companies and how competitive the UKCS remains for investment in an international context. Activity and investment are crucial to providing secure energy, and vital in sustaining supply chain capabilities and ensuring the UK is viewed as a good place

for these companies to anchor their resources. This is not only core to supporting the industry now, but also in ensuring it can provide many of the net-zero solutions required for the future. The current fragile position of many areas of the supply chain means that this future contribution cannot be taken for granted. The coming months mark a critical time for the UK oil and gas industry. It is crucial the government recognises the ongoing importance of oil and gas in a diverse energymix in its anticipated EnergyWhite Paper and through the ongoing Licensing and Maximising Economic Recovery strategy reviews. The Brexit transition period will also come to an end and OGUK continues to advocate that a deal outcome is in the best interests of the industry. Alongside this, work to agree a North Sea Transition Deal with the UK Government to accelerate the transformation of the industry is ongoing. Support for this sector is essential for the continued provision of affordable and sustainable energy supply and in realising the country’s ambitions as a leader in low-carbon solutions.

Ross Dornan, Market Intelligence Manager, OGUK

BUSINESS OUTLOOK 2020: Autumn Snapshot

Oil and Gas Market Update

Oil Market Brent crude averaged just under $41 per barrel (bbl) across the first 10 months of 2020, with the period having been one of the most volatile and unpredictable the market has ever seen. This is more than $23/bbl below the 2019 average price. During October, Brent saw a decline in price from $43/bbl on 8 October to $37/bbl at the end of the month — a four-month low — amidst concerns around the rising second wave of COVID-19 and restrictions to limit its spread. After averaging less than $30/bbl in the second quarter, there was some limited recovery in prices during the third quarter, in which they averaged $43/bbl. This was in line with the easing of lockdown restrictions at the time, resulting in increased economic activity and subsequent oil demand rates. However, demand still remains significantly below rates seen in previous years, with ongoing uncertainty around how it will continue to develop amid concerns around a second wave of COVID-19 and further economic restrictions. The International Energy Agency (IEA) has shown that demand in August was 9.3 million barrels per day (bpd) lower than in 2019. 1 Although some recovery was seen in September, this remains fragile and is likely to be impacted by an increasing second wave of COVID-19. 2 The IEA downgraded its full-year outlook by a further 300,000 bpd in September, to 91.7 million bpd — almost 9 per cent lower than 2019. The reduction in demand has driven some blocs and individual nations to implement production cuts, helping to bring an element of balance to the market. Compliance with production cuts has generally been high, though concerns around supply rates persist.

140

Nominal Average Monthly Brent Price ($/bbl) Nominal Average Monthly Brent Price (£/bbl)

120

100

Brent Price ($/£ per Barrel)

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Source:EIA Any increase in supply could result in further price reduction given the slower rate of demand recovery. Most outlooks show Brent prices remaining relatively low for a prolonged period and futures contracts remain below $42/bbl throughout 2021 and below $50/bbl until the end of 2023.

1 www.iea.org/reports/oil-market-report-september-2020 2 www.iea.org/reports/oil-market-report-october-2020

BUSINESS OUTLOOK 2020: Autumn Snapshot

Oil and Gas Market Update continued

Gas Market The average day-ahead NBP gas price in the first 10 months of 2020 was 21.61 pence/ therm (p/th), marking an acceleration of the downward trend seen in recent years. This is 38 per cent lower than the average price for the same period last year (34.64p/ th), and the 2019 full-year average of 34.70p/th. This also represents a drop of almost two-thirds compared to the same period in 2018 (58.8p/th). At one point in late May this year, the day-ahead NBP price fell as low as 8.5p/th — the lowest real-terms price observed since 2002. There has, however, been an uptick in September and October, with prices climbing to their highest point for a year at more than 41p/th. This coincides with reduced Norwegian supply and increased domestic demand for power generation. As with Brent, the long-term NBP trend is being driven by persisting and significant oversupply in the market. UK gas demand fell by 16 per cent in Q2 compared with the same period in 2019, a record low for the quarter, as a result of lower demand due to lockdown measures, higher temperatures and record levels of power generation from wind. Alongside this, supply has remained strong, both from domestic sources and imports. LNG imports remain at record levels, up 30 per cent during January to July 2020 compared with the same period in 2019 — almost five times higher than the same period in 2018.

NBP Day-Ahead Gas Price (Pence/Therm)

Source: ICIS

BUSINESS OUTLOOK 2020: Autumn Snapshot

Industry Sentiment

With the scale and severity of the challenges that industry continues to face, it is unsurprising that the sentiment expressed by companies across the oil and gas industry has declined significantly this year. OGUK has been tracking this on a quarterly basis throughout the year, as outlined below. Coming into 2020, OGUKmembers were expressing increased positivity in their outlook for the year ahead, in line with initial forecasts for stable investment and activity levels. However, the subsequent price collapse and necessary revisions to company business plans and strategies completely changed the industry landscape in a short period of time, as reflected in the sentiment levels seen throughout Q2 and Q3. The level of sentiment, and scale of change, indicated by both supply chain and E&P companies has followed a similar trend throughout the year. Looking forward, companies outline little change in their current outlook for 2021, reflecting the levels of uncertainty in the market and reinforcing the fact that current challenges are likely to persist. Companies across industry indicate that it will take time to recover activity levels which have had to be postponed and deferred from 2020.

10 = High Sentiment & Outlook 0 = Neutral Sentiment & Outlook -10 = Low Sentiment & Outlook

Industry Trend E&P Companies Supply Chain Companies

Q1 2020

Q2 2020

Q3 2020

2021 Outlook

-2

Business Sentiment Index

-4

-6

-8

Source:OGUK

-10

BUSINESS OUTLOOK 2020: Autumn Snapshot

Production

Oil Production

Gas Production

Production levels have remained relatively strong despite the operational challenges being faced, however provisional figures show that production in the first three quarters of the year was slightly lower than in 2019. When considering year-on-year output for the same time period, production has fallen by 2.5 per cent so far this year and is around 3 per cent lower than the 2019 full-year daily average. It should be noted though that production in the first half of 2019 was particularly strong due to the ramp up from some significant projects. Oil production so far this year is almost 5 per cent down on the 2019 year-to-date and full- year averages, with gas production 2 per cent higher than 2019 year-to-date levels and in line with the 2019 full-year average. Oil production in late summer has been impacted by some planned terminal outages and unplanned production shutdowns. It is possible that output may recover closer to 2019 levels in the fourth quarter. Despite the slight reduction, maintaining this level of output is a significant achievement considering the operational challenges faced this year. The industry has continued to provide crucial energy security to the UK throughout the pandemic. The UKCS achieved 80 per cent production efficiency last year — the highest level since 2004 and meeting the OGA and industry target. 3 A continued focus on operational efficiency and the deferment of many maintenance outages to reduce COVID-19 exposure and operational risk may help support levels of production efficiency in the short term, however any production gains from this could be offset by lower activity levels and some unplanned production outages.

Average Monthly Oil Production per Year

Average Monthly Gas Production per Year

Monthly Oil and Gas Production (Million boe)

July

May

March

January

November

September

2015

2016

2017

2018

2019

2020

Source:BEIS

Lower levels of new production are now expected to come onstream in 2020 and 2021 in comparison with recent years, due to the operational impact of COVID-19 and the low commodity prices. Combined with lower than expected levels of barrel-adding activity taking place, this will likely have a negative impact on output into 2021 and 2022.

3 www.ogauthority.co.uk/benchmarking/ukcs-production-efficiency-2019/

BUSINESS OUTLOOK 2020: Autumn Snapshot

Drilling Activity

450

Exploration

Appraisal

Development

400

350

300

Following on from an increase in activity in 2019, at the beginning of the year OGUK anticipated a similar level of activity for 2020. However, the operational impact of COVID-19 and low commodity prices have resulted in significantly reduced drilling rates. Fifty-four wells were spudded in the first ten months of 2020, meaning the year is now almost certain to see the lowest total levels of drilling activity since the early 1970s and the lowest exploration and appraisal activity in the basin’s history. Only six exploration wells have been spudded so far and it is possible that there will be no further exploration drilling this year. Five of these were drilled by Apache in the area around the Beryl field infrastructure in the northern North Sea, the other being Total’s Finzean prospect in the central North Sea. One appraisal well and 47 development wells have been drilled, though there is the potential for a small number of further appraisal wells and a limited number of development wells to be drilled in November and December. Despite the low levels of activity seen this year, there are still a significant number of opportunities being matured within company plans. OGUK continues to progress initiatives and support the work of the MER Task Forces to help companies across the basin unlock these opportunities. This includes work to improve partnerships to create multi-operator and multi-well campaigns which will help unlock efficiencies across the supply chain. It must be recognised that drilling and rig contractors face significant pressures and are in a fragile position, with many entering into Chapter 11 bankruptcy and taking decisions to scrap and sell units. Decisions that companies are being forced to take now will have a lasting impact on the capabilities across the industry.

250

200

150

Total Number of Wells Drilled

100

1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

Source:OGA

160

Exploration

Appraisal

Development

140

120

100

TotalNumber ofWellsDrilled

2017

2018

2019

2020 Jan-Oct

Source:OGA,OGUK

BUSINESS OUTLOOK 2020: Autumn Snapshot

Recovering Investment and Activity Levels

In Business Outlook: Activity & Supply Chain , 4 OGUK outlined how the changes in company business plans had resulted in over half of E&P companies having to defer the majority of their planned activities for this year. This, along with other measures to reduce costs and increase efficiencies has led to an anticipated decline in capital expenditure of 30–40 per cent this year, a 10–20 per cent reduction in operational expenditure and a 25–30 per cent fall in expected decommissioning spend. This is likely to result in a year-on-year fall in total industry expenditure of £3–4 billion compared with initial expectations for this year. However, it is important to recognise that the industry will still spend upwards of £10–11 billion in 2020 and it remains amongst the UK’s largest industrial investors. At the time of writing, companies are going through business planning and budgeting processes for 2021 and due to the continued fluidity in the market it is still too early to make a robust and clear estimate of 2021 investment levels. However, given the ongoing challenges, it is likely that investors will continue to take a conservative approach. The level of activity and expenditure in the next 12 to 18 months will be dependent on a number of factors including the ability to continue to safely increase offshore personnel levels, prevailing market conditions, company cash constraints and the ongoing competitiveness of the UKCS for investment. Looking to 2021, companies will continue to be challenged to explore ways to implement further efficiencies.

Increasing activity and investment levels from those seen this year will be important froma reserves progression perspective and are also vital in providing new opportunities for the supply chain. Companies across the supply chain continue to see revenue and margin reductions, and many are operating at unsustainably low levels. However, it will take time for the activities lost this year to be recovered and it is not simply a case of moving everything into 2021. OGUK anticipates that it could take two to three years to rephase and recover the activity lost from 2020. This will be dependent on factors including the nature of the work programmes, demands from other activities within company portfolios, the ability of the supply chain to service demand and how market conditions continue to develop. Innovative and collaborative working across operators and supply chain companies can unlock new opportunities and the regulator also has an important role to work constructively with the industry to keep activity on the table.

4 www.oilandgasuk.co.uk/product/business-outlook-report/

BUSINESS OUTLOOK 2020: Autumn Snapshot

Recovering Investment and Activity Levels continued

12,000

It is key that the UK industry remains competitve to retain and attract investment in the face of increased international competition for a restricted capital pool. Whilst the UKCS continues to be a relatively expensive basin in terms of operating costs, recent improvements (a reduction from over $30 per barrel of oil equivalent [boe] to $15/boe in unit operating costs) have helped and it is important these are maintained. Alongside this, it is important that the government reinforces the triple importance of the domestic oil and gas industry and its crucial role in supporting the wider decarbonisation of the UK economy. It is vital that this is emphasised in the forthcoming Energy White Paper, the Licensing and MER strategy review and that the competitveness and stability of the fiscal regime is maintained. It is also crucial that companies are able to continue to safely increase offshore personnel levels to allow more offshore activities to be completed. The number of personnel working offshore at any one time fell by over 40 per cent between March and April as companies reduced activities and looked to minimise personnel exposure risk as far as safely possible. Although offshore numbers have increased in recent months, staffing levels have not yet reached those seen prior to the pandemic. Looking to 2021, 40 per cent of E&P companies and half of supply chain companies have indicated that more than one-third of their 2021 plans are contingent on being able of increase offshore personnel levels. It is important that activity levels on the UKCS keep pace with those in other basins to ensure that it remains a competitive place for supply chain companies to anchor and invest in resources. These capabilities are crucial to maximise the UK’s resource potential, but also will have a vital role in providing the solutions required to achieve a net zero outcome by 2050.

11,000

10,000

9,000

8,000

7,000 Number of People Offshore

6,000

5,000

05-Jul

12-Jul

19-Jul

26-Jul

07-Jun

14-Jun

21-Jun

28-Jun

05-Apr

12-Apr

19-Apr

26-Apr

30-Aug Source:VantagePOB 06-Sep 13-Sep

20-Sep

27-Sep

02-Aug

09-Aug

16-Aug

23-Aug

01-Mar

08-Mar

15-Mar

22-Mar

29-Mar

03-May

10-May

17-May

24-May

31-May

BUSINESS OUTLOOK 2020: Autumn Snapshot

oilandgasuk.co.uk info@oilandgasuk.co.uk

@oilandgasuk Oil & Gas UK

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