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How Lower Oil Prices, Brexit Are Impacting North Sea Operations

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By Muhammad Ali Khawar on Jul 19, 2016 at 7:35 am EST

Thanks to Brexit vote, the oil and gas markets are experiencing significant level of uncertainties. With UK now stepping out of the European Union, many oil and gas companies have reduced operations as they feel that demand may not be as robust as it used to be.

The North Sea is one of the highest cost regions in the world. With the recent development in the UK market, companies fear higher costs, which can derail operations in the region. As reported by Bloomberg, Wood Mackenzie, a consulting firm, has indicated that around 30% of the fields in the region are operating at a loss.

The prolonged downturn in crude oil prices had already pushed investors and company sentiment to all-time low. Although crude prices made a solid recovery amid production outages and strong demand expectations, the commodity on Monday again stopped to their two-month lows.

During Asian trading on Tuesday, the US benchmark for crude oil, West Texas Intermediate (WTI) was down 0.18% at $45.16 per barrel, while the global benchmark for crude oil, Brent Crude was down 0.40% at $46.77 per barrel.

Energy companies in the North Sea have already adopted cost cutting measures, such as slashing the capital expenditures and employee pays. Royal Dutch Shell plc. (ADR) (NYSE:RDS.A), one of the world’s leading integrated oil and gas company is also looking to slow down its operations in the Brent field. The company has been pumping crude from the field since 1970 and, according to Bloomberg, production from the field plays a major part in setting the global benchmark for crude oil, Brent Crude.

Shell has about four Brent platforms in the North Sea, out of which only four are operational. Shell, on its website, mentions that “Brent is just one of around 470 installations that will be decommissioned in the UK sector over the next 30 to 40 years.” It also mentions that “some 10% of the North Sea has entered the decommissioning phase. Some 40 decommissioning programmes have been submitted to the government’s Department of Energy and Climate Change (DECC).”

As reported by Bloomberg, UK’s Oil and Gas industry has indicated that the decommissioning costs through 2024 would rise to $22.4 billion representing an increase of 16% when compared to a previous 10-year forecast made in 2014.

Historically oil has traded at a high price, with a reputation of scarce demand in the market. However, the shale boom in the US has revolutionized the world as the world experiences a glut. In the past, when oil was over $100 per barrel, companies would have been enthusiastic to take technological upgrades, but now with the commodity at low levels, companies are reluctant to invest in this area.

Shell has tried to prolong the life of Brent fields and explore different arenas. Sadly because of old infrastructure, this has become an impossible task.

Workers of Wood Group Oil &Gas in the North Sea are not happy with the latest decommissioning in the North Sea and have plans to go on a 24-hour strike on July 26. The strike is the first of its kind in 10 years. Reuters reported that because of the strike, seven of Shells operations might be impacted, which includes the Brent facility.

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