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North Sea oil firms buoyed by Brexit

July 26, 2016

A weakened British pound caused by the U.K.’s vote to leave the European Union has thrown a lifeline to a group of businesses on the brink—small oil companies plying the North Sea.

The fall of the British pound to a 31-year low after the June 23 referendum has lowered labor, equipment and engineering costs for companies that have major operations in Scotland, the main base for North-Sea outfits. These companies sell oil in dollars but pay employees and the majority of their costs in the weakened British currency.

Until now, they had been walloped by the slump in crude prices and the declining productivity of aging fields offshore of Britain. Now, they finally have something cheer about, even as the uncertainty created by Britain’s decision to leave the EU, known as Brexit, has slammed other U.K. industries like travel companies and banking.

“I don’t really see any negatives, other than general market uncertainty,” said Tony Durrant, the chief executive of Premier Oil PLC, a London-based company that pumps about 60,000 barrels of oil equivalent a day, mostly from the North Sea. “Our dollar income is going to buy more and it’s going to reduce our costs,” he added.

Oil giants like BP PLC and Royal Dutch Shell PLC, which have large North Sea operations and big suites of London-based executives and office workers, are also winners. Their share prices have jumped to 14-month highs since the Brexit vote, after declining along with oil prices for the past two years.

However, Shell—a company with more than 90,000 workers in over 70 countries—said the impact of a weaker pound is likely to be relatively small. BP declined to comment.

Around 60% to 70% of spending on North Sea oil and gas is in British pounds, says energy consultancy Wood Mackenzie. Last year, companies invested over £11 billion ($14.6 billion) in North Sea fields and were expected to spend around £10 billion this year, according to trade association Oil & Gas U.K. estimates in February.

Mr. Durrant said his company is saving $100 million on a new North Sea oil-field development called Catcher because the pound’s decline has allowed it to budget for an exchange rate of $1.31 against the U.K. currency, instead of $1.60 per pound when the project was planned two years ago. The project’s overall cost has been reduced by about 20% to $1.8 billion from $2.26 billion in 2014, partly because of lower contractor rates.

Further savings from the weak pound will come when oil begins to flow next year, Mr. Durrant said.

The pound, which earlier this month fell below $1.30 for the first time since 1985, is now trading around $1.32. It is currently trading around 11% below a peak of $1.50 on the day of the referendum.

Some British company share prices, which are denominated in pounds while the value of their oil fields are in dollars, would have received a boost from the exchange rate, said Tony Craven Walker, CEO of Serica Energy PLC, whose London shares have risen around 28% since the June 23 referendum.

“It’s definitely been a short-term positive coming out of Brexit,” he said.

Until now, Premier and its rivals in the North Sea, like EnQuest PLC and Ithaca Energy, had been blasted with a steady stream of bad news. Investors punished their share price for their high debt levels after oil prices began a steep descent in 2014, sending Premier and EnQuest down 80% and Ithaca 60% lower. EnQuest declined to comment. Ithaca was unavailable to comment.

The North Sea has long looked like a bad bet.

Earlier this year, when oil prices were trading around $30 a barrel, nearly half the region’s fields were operating at a loss, according to Oil & Gas U.K. Britain’s remaining offshore barrels lie deep underwater in tough-to-drill reservoirs and some infrastructure is old requiring constant maintenance and repair. Total costs, including finding, developing, operating and decommissioning, are around $50 a barrel—among the highest in the world, despite efforts at cost control, according to Oil & Gas U.K.

Companies have to spend huge sums to drain the British North Sea of its last drops of oil. Once one of the world’s great petroleum basins, churning out more than 2.7 million barrels of crude oil a day at its height in the 1990s, production in the North Sea has declined to around 900,000 barrels a day in 2015.

Now, the falling pound makes it cheaper for North Sea-focused companies to pay back some of the debt they took to launch expensive projects. Premier, for instance, has £250 million of debt drawn in pounds, which will be cheaper to pay back now because its dollar income is stronger.

Brexit, however, isn’t all good news for the North Sea oil industry. Volatility on financial markets could cause new bank funding to dry up. There are also worries that Scotland, which voted to stay in the EU, could split from the U.K. and put the debt-laden Edinburgh government on the hook for billions of dollars in liabilities to wind down old fields.

A lack of clarity over these costs in the past has slowed down mergers and acquisitions in the region, analysts have said.

“Going forward, Brexit has created uncertainties in the market,” said Aidan Heavey, chief executive of Tullow Oil PLC, an Africa-focused company with some gas production in the North Sea.

By Selina Williams

Source: Wall Street Journal

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