Andy Brogan, Global Oil & Gas Transaction Leader, EY
EY’s global oil and gas transaction leader talks about why London is so important for the global oil and gas sector, and what makes the UKCS still so attractive today.
You have been with EY for 21 years. In that time, the oil price has fluctuated greatly. With the current relatively stable price of oil, what is driving investment decisions in the UKCS?
There are a number of factors affecting development but the first and foremost feature of the UKCS is that it is a mature basin: as such, whilst there are still some strategic assets in the UKCS, much of the investment is financially driven. Over the last 25 years, the UKCS has gone through the full operational life-cycle, from the first flush of easy to access resources, a second wave of satellite builds, then a series of discoveries delivered by improved exploration technology, followed finally by the growth of the late asset specialists. What drives investment now in the North Sea is the fact that it remains profitable, as a result of the fact that there is a huge quantity of installed infrastructure in the North Sea that new projects can tap into. Access to this infrastructure on commercially viable terms is of huge importance when it comes to maintaining overall production levels in the North Sea.
The UKCS has a couple of further advantages. The North Sea is within an OECD country; one of few basins where this is the case. This has an impact on the risk profile of investments in the basin. The sector also benefits from a well-developed supply chain: the UKCS is a relatively easy market to work in. Finally, the UKCS has demonstrably the best offshore HSE framework in the world: training staff in this environment is of particular value. The UK ticks the boxes for having low political risk, ease of supply and provision for producing, and a globally competitive safety record.
However, the UK has suffered from a certain amount of fiscal volatility. The situation is satisfactory at the moment, but given the fact that projects going ahead today are much more sensitive to economic inputs, a stable tax regime is more important than ever.
Will the newly-proposed regulator be able to end this variability in the rules governing the UKCS? What would EY propose as the best possible set-up for the UK?
The key thing is that any set-up must be stable and promote efficient use of existing infrastructure. Apart from promoting increased access to infrastructure, it would be sensible not to change it to any great degree elsewhere. The last round of substantial fiscal changes, which policymakers subsequently rowed back from, did have an adverse impact on gas producers in particular. If anything were to be done to change the current set-up, looking at the relative return implications for gas vs. oil fields would be a good place to start.
How important is oil and gas to EY’s UK business today? What advantages do you receive from being placed here in London?
For EY, oil and gas is a key industry sector. It is one of the top industry sectors that we look to invest in over the long-term. In the UK, oil and gas is key to EY’s business. Having a significant base here in London – the firm’s second largest oil and gas group globally – is essential because London is the primary centre of oil and gas financing outside the US. The hub here gives the business great access to key decision makers.
On the advisory side of the business, there is a great deal of intellectual capital in London. EY’s local offices in East and West Africa, Eastern Europe and the Middle East, among others, like to have staff from London support them. Having the London base allows EY to stay up-to-date with industry developments.
You have stated that London is central to accessing finance for oil and gas companies. Where else abroad might give access to capital?
The money comes from many sources; flowing in from the OPEC countries, the Far East, Southeast Asia, South America, the US and Europe. However, this finance primarily flows through New York and London. Secondary routes for finance include Singapore, Canada and Australia, which have visible non-governmental flows of wealth. Beyond this, governmental and sovereign wealth funds can be accessed in situ, but often the funds are managed in London. In terms of accessing the maximum volume of finance for the minimum effort, London and New York are the go-to places.
Last year was one of record investment in the UKCS, though this is predicted to tail off. What needs to change for this interest to be maintained?
As the Wood Review identified, access to infrastructure needs to happen on a commercially viable basis. The other thing is the cost position: over the last three years, we have gone from a situation where participants in the sector were facing a rising price environment to one where the decision makers expect a more stable outlook for prices. They have become increasingly focused on battling rises in input prices.
Over the last decade, cost inflation has been substantial. Having absolute clarity on how much something will cost and when it is delivered is vital when sanctioning projects, particularly in the North Sea. Project operators and owners have a clear incentive to de-risk the projects costs and projects timings.
Currently, when it comes to investing in any basin, the world is being affected by a great suction of capital towards the US, as it develops its unconventional gas and oil resources. Being aware of this and the returns on capital on projects in other basins is key for establishing whether a project will be attractive for investors.
How is EY dealing with the influx of smaller players to the UKCS?
EY is helping these companies to access and purchase assets. The UKCS was developed by IOCs with help from the large American independents. The IOCs focus on world-scale assets and they have progressively become focused only on the larger assets important to them, divesting the rest. Of all the players, the US independents have seen the greatest call for capital from US onshore. US independents are divesting and moving capital to North America.
The companies coming into the UKCS more recently have been local independents, such as Enquest. There are also NOCs looking to acquire skills and capabilities here, and trading houses are also acquiring assets. EY helps companies understand what they are buying: EY has always advised businesses such as these from a financial perspective, but is now doing so from an operational angle as well.
EY also helps smaller companies access capital, be it equity or debt. There is available capital in the market at the moment, but smaller companies are the ones who sometimes have a greater struggle accessing it.
EY has assisted Oil and Gas UK with various initiatives that have supported the entire industry.
What do you feel the UKCS still has to offer?
The UKCS is the best of the offshore basins in terms of HSE, both in terms of how it is set up and operationally. This is an example to all other basins. As many offshore staff elsewhere started their career here in the North Sea, these practices have been taken with them abroad.
The disaggregated supply chain, involving many partners, was very much developed here in the North Sea. Particularly for NOCs, who in their home country might only use set suppliers, the North Sea offers a great means to learn about disaggregated supply chains and sourcing equipment from a wide number of suppliers.
What do you feel the role and responsibility of EY is with regard to encouraging responsible business practices?
For the last five years, EY has sought to place itself alongside the industry to continually improve the industry’s performance. This has included building on the excellent standards already in place. We have also made the case for the industry as a career choice. It is one of the most high-tech businesses out there and represents a great career path for science and engineering graduates.
EY is also looking at improving practices to deliver projects on time and on budget. We are working on our own, and with industry partners to do this.
Thirdly, EY facilitates access to capital, through helping companies divest assets, raise capital, as well as invest it.
For the last couple of years, EY has systematically invested time and effort in activities such as quantifying and championing the upstream supply chain, either by itself or for industry bodies. The purpose of this is to help the industry make its case more effectively.