Our Risk and Reward in the United Kingdom Continental Shelf (“UKCS”) series has reported on the challenging times recently faced by the UKCS oil and gas industry. The past week has seen positive developments in the form of newly awarded exploration licences and the first modest improvement in the industry’s quarterly outlook since 2013. In this post, we outline these developments and their potential impact.
41 New Licences Awarded in the 28th Offshore Licensing Round
On 27 July 2015, the Oil and Gas Authority (the “OGA”) (the newly created UK oil and gas regulator) announced the award of a further 41 new licences in the 28th Offshore Licensing Round, in addition to the 134 licences confirmed by the Secretary of State for Energy and Climate Change on 6 November 2014.
This award makes the 28th Offshore Licensing Round one of the largest rounds in the five decades since the first licensing round took place in 1964, with a total of 175 licences covering 353 blocks.
The UK Government described the award as “a welcome boost” to oil and gas exploration in the UKCS. Andy Samuel, Chief Executive of the OGA, added that “licences are however just a start and industry, government and the OGA now need to work together to revitalise exploration activity across the basin and convert licences into successful exploration wells.”
Mr Samuel’s comments appear to broadly reflect the current mood of companies active in the UKCS, according to Oil & Gas UK’s Business Sentiment Index, which was published on 29 July 2015.
Business Sentiment Index for Q2 2015 Shows Modest Improvement in Outlook for First Time Since 2013
Oil & Gas UK’s Business Sentiment Index measures a number of economic indicators to capture the outlook of the industry for each quarter. As the graph below shows, in the second quarter of 2015 (Q2 2015), optimism in the UK oil and gas industry increased from minus 31 points to minus 27 points (on a -50/+50 scale):
Business Sentiment Trend, Oil & Gas UK Sentiment Index, Q2 2015
Oonagh Werngren, Oil & Gas UK’s operations director, said: “While the overall index remains in negative territory for the fourth quarter in a row, this slight improvement in mood is the first upward movement we have seen since Q1 2013.”
The Office for National Statistics (the “ONS”) estimated that the UK’s economy grew by 0.7% in Q2 2015, with a “surge” in North Sea oil and gas production lifting overall industrial output by 1%. The ONS reported that this increase was driven by the package of support for the UKCS oil and gas industry announced by the UK Government in March 2015 (see our blog post on UKCS developments in Q1 2015).
However, Oil & Gas UK’s Business Sentiment Index reported that higher activity levels in Q2 2015 may be due to preparations for the annual summer maintenance programmes, when levels traditionally increase on the UKCS.
While the above developments hint at a moderate improvement in the outlook for the UKCS oil and gas industry, it may not signal the start of a upward trajectory in the long-term. Oil & Gas UK emphasises that the business environment remains tough and the industry fragile, with respondents to the Business Sentiment Index expressing concerns over significant issues in the future if the oil price does not recover.
UK Energy Minister Andrea Leadsom confirmed on 27 July 2015 that the UK Government is “determined to make the most of our North Sea resources” and was “backing our oil and gas industry.” To that end, the Energy Bill 2015-16 was introduced into the House of Lords on 9 July 2015, with an emphasis upon continuing to “support the development of North Sea oil and gas.” We will continue to monitor UKCS developments, including the progress of the Energy Bill 2015-16 through the UK Parliament.