The affect of fraught conditions in oil markets on North Sea companies was revealed yesterday as John Wood Group and Cairn Energy announced their half-year results.
Wood Group revealed it has axed around 5,000 jobs in response to the decline in crude oil prices, with 1,000 of them coming from North Sea operations.
The company's revenues fell 19.3 per cent from $3.8bn (£2.4bn) to $3.7bn in the first half, while earnings for the same period fell 7.4 per cent to $225.9m.
Meanwhile, Cairn Energy, which is in the process of establishing two new projects in the energy-rich region, Kraken and Catcher, announced losses of £230m.
Operations in the North Sea have been badly affected by a collapse in the price of oil of more than 50 per cent since June last year, when Brent crude was trading at $115 a barrel. The price for Brent crude is now closer to $49.
Chronic over-supply lies at the heart of the deterioration in price of oil. A boom in the US fracking industry saw the country overtaking Saudi Arabia as the world’s largest oil exporter, while a slowdown in the Chinese economy has hollowed out demand.
Saudi Arabia has reacted by aggressively expanding production to capture a greater share of the market, funded initially by its large capital reserves, but more recently by borrowing.
Meanwhile, the lifting of sanctions against Iran has raised the prospect of an influx of oil in the future. However, it could be two to three years before the Islamic Republic increases its production sufficiently to become a major contributor to the global market.
In February of this year, a report by offshore watchdog UK Oil and Gas identified “early signs of a gentle recovery” in Brent crude, But the easing of sanctions against Iran, coupled with a continuing fall in demand from China, eradicated a small rise in prices to $67 in June and pushed them back towards their January low of $48.
The relative old age of operations in the North Sea poses particular challenges to companies operating in the area, due to the increased costs inherent in old pipeline networks.
Cost-cutting measures made by Wood Group are likely to be followed by others in the sector, as companies attempt to lower their production costs and return to profitability as soon as possible.
George Reed, director at Thorold Dewling Oil and Gas Recruitment, said: “The market conditions are really challenging, and it’s going to be low prices for at least the next year. It is still viable [in the North Sea], but it’s going to be difficult to compete. It’s a case of everyone cutting their costs.
“Wood Group’s results are not catastrophic; the panic isn’t justified. Wood Group were the first company to cut costs, nine or 10 months ago, and they’re a strong firm.”
Markets seemed to agree with Reed’s analysis. Yesterday, Wood Group’s share price, which had fallen 4.8 per cent, recovered, finishing up at 581.5p.
Reed added that recent investment by two Malaysian companies, Hibiscus Petroleum and Ping Petroleum, offered the sector a further “glimmer of hope”.
Hibiscus and Ping bought the Anasuria cluster of assets from Shell and ExxonMobil earlier this month for close to £70m, marking their entry into North Sea excavation.
While the deal hastened the departure of the world’s largest oil companies from the North Sea, Hibiscus and Ping said in a joint statement that UK government efforts had encouraged “smaller independents to invest and revive the North Sea basin”.
Hibiscus said: “The Anasuria cluster has development potential for a company of the size of Hibiscus and provides us with an excellent foundation upon which we can build a significant North Sea presence.”
Cairn Energy closed down 7.25 per cent at 143.2p yesterday.