(MENAFN- ProactiveInvestors) When Brent crude slid to US$60 a barrel in mid-December one senior industry player warned UK's North Sea oil sector was in "crisis".
Fast forward less than a month and the oil price is hovering around five-and-a-half-year lows of US$50.
So are the North Sea explorers –already faced with high costs and even higher taxes - really on the brink
“It’s definitely a crisis” said Ashley Kelty oil & gas analyst at broker Cenkos.
“Oil firms with expensive ongoing developments and those highly geared are in real trouble things will be tough for a couple of years.”
For the UK industry Kelty said it’s now a question of how long prices stay at this level.
“The best result North Sea explorers can hope for is that Brent Crude picks up to US$70 a barrel by the end of this year.”
Kelty though expects prices to fall further in the short term.
The OPEC cartel continues to resist calls for cuts in production even in the face of a supply glut and an even more worrying scenario for oil firms is the prospect of a fall to US$40 a barrel in the coming weeks.
Retrenchment has started already. This week troubled () dropped several North Sea oil exploration projects after failing to find farm-in partners.
Even the majors are being prudent. (LON:) announced in December it would spend over $1bn cutting hundreds of jobs due to lower oil prices.
Analysts at JP Morgan Cazenove expect this will be an increasingly common theme if oil prices don’t recover.
“By and large we expect E&P companies to turn more defensive” the broker said in December.
“Firms will react to stretched balance sheets and lower oil prices by cutting exploration and focusing on more tangible production and development opportunities.”
The North Sea is especially exposed JPM said as there is no downside protection in the tax and royalty fiscal terms and in general fixed operating costs are very high.
The price slump to U$50 a barrel this week prompted Oil & Gas UK to call for a significant reduction in the headline tax rate for North Sea producers.
The offshore industry group says George Osborne’s recently proposed reforms to tax allowances – which have yet to come into effect - do not provide enough support for producers now that crude now has fallen to US$50 per barrel.
“Sharply falling oil prices are now adding to the significant challenges the UK offshore oil and gas industry was already facing” said Malcolm Webb Oil & Gas UK chief executive.
“The current tax regime is one such challenge and a key factor for companies making decisions on investment and activity.”
Webb added that urgent changes to the tax regime are needed to sustain and encourage investment in the North Sea.
Dougie Youngson an oil and gas specialist at broker finnCapp reckons the reaction may be stronger due to the fact prices have been high over the last few years.
In turn that means firms have had a chance to build cash reserves buying themselves some time.
“The price slump will take time to feed through to North Sea explorers but as we move further into 2015 we’ll begin get a sense of how bad things are.
“Ultimately firms will have adjust capital expenditure and sit round the table and work out their investment case.”
According to him () offers a bright spot in an otherwise gloomy market.
The firm’s Stella field located in the heart of the Central Graben area of the Central North Sea is a high margin project with a breakeven of US$32 a barrel.
More importantly Youngson says the firm has managed to hedge 50% of its production at US$102 a barrel.
“In terms of the impact on individual company’s hedging policy is crucial” Youngson adds.
On the other side both EnQuest given its near 100% exposure to the North Sea () and operators of Kraken and Catcher fields respectively are particularly exposed to the oil price; according to JPM analysts.
Kelty agrees and adding that he expects to see higher amounts of M&A among North Sea firms as a result of the price decline.
The UK elections also throw uncertainty into the mix and Kelty reckons a Labour victory would be more harmful than a Conservative one given the likelihood of it spending more on green projects.
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