Jeff Sluijter – Partner, EY Netherlands
The head of EY Netherlands’ oil and gas practice offers his perspectives on the challenges currently facing both the upstream and downstream.
The makeup of the Dutch upstream sector largely reflects the current market situation: this is a mature market, and many of the larger players have moved out, to be replaced by smaller operators. There are more operators here today than in previous years ago, including some that have entered upstream operations for strategic reasons, including GDF Suez and Taqa. The general consensus seems to be that Dutch upstream is still interesting, because of the relatively low capital requirements and low political risk. Today, companies like ONE see an opportunity because with the low oil prices, some smaller companies are running in to problems: this presents an opportunity for the company to buy up reserves.
However, one important thing to consider is that the overall level of activity in the market today is not increasing, despite the number of new companies arriving. EBN is already starting to work to increase activity in the upstream, through preparing seismic data on new blocks with Fugro, which means that data is available for newcomers. They also want to share technology, which will allow new companies to operate more efficiently.
However, in general I believe that the current government’s focus on renewable energies means that they are not properly incentivizing the production of gas in the Netherlands. The current focus is all on renewables, as the public perception of gas is that it is a dirty fuel – this ignores the fact that coal consumption is increasing because of the gap between renewable supply and domestic demand for energy. If investment were put into increasing gas power generation, it might in turn make the upstream more attractive.
The government created a program to consider the development of the energy sector a few years ago, called the ‘top sector’ program: but when they set this program up, they forgot to invite the oil and gas sector, who had to lobby for inclusion in the discussions. The oil and gas industry is worth EUR 15 billion a year and contributes 16,000 jobs to the Dutch economy – this is sometimes forgotten. If the government continues to place such a focus on renewables and makes no space in the discussion for oil and particularly gas, in 20 years we will no longer be a net exporter of gas.
The original vision behind the creation of the gas roundabout was security of supply.
That’s absolutely true. It’s about securing your supply and demand in a stable manner. Perhaps the concept of the gas roundabout was initially over-hyped, and today there is still some surplus storage capacity, but this will settle down: events such as the expansion of Gate terminal will ensure that gas continues to come in, which will be crucial as the need for a secure energy supply increases. Uncertainty is still there, which makes having the proper storage infrastructure in place crucial: the global gas market has shifted in recent years, and now with the drop in the oil price, governments are starting to question the viability of major supply projects, including, for example, the LNG projects in Australia. Although it is predicted that demand for energy will rise globally, and there will be a period where oil and gas remain dominant in supplying this rise in demand, new projects often require huge investments – and the market uncertainty means that no one is investing. Which in turn leads to the situation where companies like Fugro have to issue profit warnings.
It is in this context that a solid gas infrastructure makes sense: the Netherlands is extremely fortunate to have its geographical position in the center of Europe, and close to the sea. We already have a lot of the infrastructure in place for the gas roundabout to make sense, including pipelines to the UK, northern Europe and Russia. It is still a viable concept. And right now, storage capacity is highly sought after.
BP wants to sell its oil storage terminal in Amsterdam. Is this representative of a larger trend?
The market is certainly changing: while operators want to concentrate more on their core business and often want to generate cash, new types of players are seeing oil and gas infrastructure as solid investments, such as the pension company that recently bought a pipeline from GDF: they see the guaranteed demand and annual dividends as a low-risk investment. Other independent players are also stepping in to the market, such as VTTI and a subsidiary of Petronas. Companies like Vitol, the owner of VTTI, see an opportunity to combine their trading expertise with the downstream and create a more profitable model than traditional integrated players. I believe that in infrastructure, the market will eventually change completely – and storage is critical: if you are in the right location, it performs a critical function.
How attractive is the Netherlands today as a refining hub, in the context of squeezed margins and over-capacity in Europe?
Margins are tight, but most of the main players here still see Rotterdam as an important global refining hub: BP, for example, has a very flexible refinery here, which is performing well; Shell reports the same from its Pernis refinery. However, the suppliers will face a tough time in the coming years as operators look to cut costs.
Once again, the Netherlands is lucky to have its location on the water, and on the frontline of the rest of Europe. Many of the refineries here were also built to be very flexible, which gives more options in difficult moments. However, not all companies are keen to hold on to their refineries. Q8 for example, is looking to sell. However, overall it is still an attractive market, despite the decline in demand for refined products in some developed markets, including the Netherlands. The main knock-on will be to the service sector.
What is EY’s current scope of work in the oil and gas sector in the Netherlands?
EY is organized into sectors, as we believe it is key in specialized industries to have people working for clients who are a match in terms of experience and expertise, and it also works to motivate our teams, that are attracted to certain industries. Today, the energy sector is the largest in EY Netherlands, with a turnover of approximately EUR 150 million last year, and around 300 dedicated professionals working in the group. Year-on-year, we have grown at around four percent, and the main constraint for further growth is a lack of talent, which is also shared with the sector.
What are your thoughts on remaining competitive and adding value in today’s environment?
On the audit side, having experience, expertise and competence in the sector is crucial, and having teams dedicated to one particular sector works very well to address this. We also combine people within audit to share experience from our various audit clients. EY is currently the market leader in audit in the Netherlands, with around 50 percent, and includes nearly all the major operators, including EBN.
While our colleagues in the advisory side of the business might think that we prioritize audit over advisory services, that is far from the case: one of the reasons we are so strong in audit today is because of EY’s international portfolio of clients.
The other part of the practice consists of tax services, advisory, transaction services, corporate finance, and also legal services, which operates as an affiliated company. Our tax group is a dedicated team of six partners and 60 consultants under them, familiar with every aspect of tax in the oil and gas sector, from state profit sharing to indirect taxation. Again, we can add value by transferring knowledge from across the sector: the team understands the market risks, and can advise clients based on the experience of other companies.
The oil and gas industry is marked by increasing challenges: it’s becoming more expensive to extract, and in locations that can be politically risky, but these are situations where we can add value to our offering: we understand how to support our clients in these areas, and this is where we focus many of our current studies.
Finally, our global practice can offer a lot to clients based here in the Netherlands: we can offer project management services from our bases in the US and the UK, for example. That’s one of the advantages of being a truly worldwide firm, and where we are a little ahead of our competitors in the market.