Examintion of Witnesses (Question Numbers
20-39)
MR STEVE
JENKINS, MR
ALAN BOOTH
AND MR
MARTYN MILLWOOD
HARGRAVE
11 MARCH 2009
Q20 Anne Main: Surely, you expect
prices to rise significantly once the global economy comes out
of recession, so can you not build in an allowance for these fluctuations?
Mr Jenkins: It is a long-term
plan. You decide, when you are going to develop a field, that
it could be four or five years until that field comes on-stream.
Contracts are awarded at that time. Economically-wise there are
a lot of oil companies that—the submissions we put in to
this Committee and the Treasury are based on $50 oil, so even
above where we are at the minute.
Mr Booth: Perhaps I can give you
an actual example of how costs have moved. In 2004 in my previous
company, we were drilling exploration wells in the North Sea,
and a suitable rig cost $60-70,000 a day. That same rig now costs
upwards from $350,000 a day. Now that the oil price is back to
where it was in 2004, we cannot afford to pay $350-400,000 a day
for a rig. It is not economically viable.
Q21 Anne Main: The balance sheet
you are describing—is this all contributing to why you are
having trouble accessing funds?
Mr Booth: It is definitely a part
of it, yes. The cost of exploring—the risk that you put
into drilling a well, is too high, given the cost environment
we are in—the ability to make returns.
Q22 Anne Main: Why are your drilling
rates for rigs so much?
Mr Booth: These are not our rigs;
these are rigs owned by drilling contractors.
Q23 Anne Main: Why have the drilling
rig rates not reduced?
Mr Booth: Because there has been
a lot of demand for them.
Q24 Anne Main: So you feel that you
are over the proverbial barrel!
Mr Booth: Prices will fall. There
is obviously a reluctance from drilling contractors to see those
rates fall, and at the moment that is where we are in the industry.
The drilling contractors quite like charging $300-400,000 a day
for a rig rather than $70,000, but the industry does not want
to use rigs at £300-400,000 a day, so it will correct. The
costs related to drilling rigs, or steel, whatever, will necessarily
fall. The issue has been that as an industry there has been a
shortage of people. Now the cost of people has risen significantly,
and it is extremely difficult, if not impossible, to see those
costs come back significantly.
Q25 Anne Main: You are painting rather
a depressing picture, if I might say so! You have the inability
to access the necessary infrastructure; you are disadvantaged
in drill rig prices; you appear to have lack of access to funding,
and possibly because you are smaller even more so: what is the
point?
Mr Booth: Of?
Q26 Anne Main: You being in the market.
Mr Booth: Well, we are not in
the market at the moment. As an example, for the last 15 months
my company, which is a small listed British company, drilled seven
wells. Next year we will likely not be drilling any wells.
Q27 Anne Main: A small British company
being brought down by the economic recession or just by the big
boys crowding you out?
Mr Jenkins: It is not the big
boys. It is—okay, contractors. It is the fact that usually
there is a six-month lag in cost. If you have oil at $140 a barrel
and it has fallen down to $45, there is usually a six-month lag
until costs catch up. We have not seen that happening. A lot of
these rigs are on long-term contracts, so therefore they are not
coming back on to the market until summer time or in the autumn
time.
Q28 Anne Main: What can be done to
help? What are you asking for in terms of financial support or
intervention or alteration?
Mr Booth: I do not think we are
asking for support. In our submission we have the example of my
own company. We have £25 million of tax pools, which are
costs we have sunk into the North Sea. If we were a producer we
could claim those back straight away, offset against our income;
however, I cannot get into a cash-flow producing situation because
I cannot either borrow money or get more equity to develop the
fields I have found.
Q29 Chairman: We are going to look
at the fiscal regime.
Mr Booth: It is a fiscal regime
issue. I guess I am just asking for those funds to be brought
back to me so that I can reinvest them in the North Sea.
Q30 Anne Main: If there was some
sort of conversion, like a planning conversion, for change of
use for the field that you found to go to carbon capture storage,
something like that would be—
Mr Booth: That is certainly one
issue, yes.
Q31 Anne Main: Change of use for
the licence.
Mr Booth: Yes. The other one that
I mentioned is that I have money tied up effectively with the
Government, which if I were a producer would come straight back
to me, as an offset against my tax bill. I cannot achieve those
funds because I cannot get into a position to produce cash, because
the banks do not want to lend me money to develop the fields I
have found. So my equity investors can see that investing in smaller
companies like this is not efficient, because half the money—we
are on a 50% tax regime—gets stuck until I can get the cash
flow, but I cannot get the cash flow because the banks will not
lend me money to develop the field that we found. That is exactly
where I am right now.
Chairman: I know that Mike wants to touch
on this and also the investment strategy.
Q32 Mr Weir: You say in your submission
that the Royal Bank of Scotland has pulled out completely, and
that was one of the main lenders in the North Sea. How many banks
are now lending in the North Sea?
Mr Booth: One.
Q33 Mr Weir: That is a monopoly of
lending. You say you cannot get lending. What impact is that having,
and what can be done to alleviate that?
Mr Jenkins: We would like more
banks to lend. At the minute the only one lending in the North
Sea at the minute is the merged Lloyds/HBOS. It has a very good
oil and gas franchise. It built it up. I represent a small company,
and we have relationships with HBOS which we built up. We have
a facility with them, which we are just going to roll over, which
is going okay at the minute, but if we came in as a new borrower
the door would be closed. We would like more banks to lend in
the North Sea—we have one, and there may be a few French
banks—but really banks that have large businesses here lending
to small oil companies to develop the fields.
Q34 Mr Weir: One of the complaints
that onshore businesses make is that even when they can get credit
it is now dearer than it used to be. Is that something you are
finding as well?
Mr Jenkins: First of all, you
have to get the banks' interest that they are going to lend you
any money whatsoever; then you are finding that the up-front fees
and the known drawing fees are higher than we have experienced.
The cost of lending has not really come down because of the up-front
fees. Banks are tending to make their money now on the fees, rather
than—
Q35 Mr Weir: It is happening offshore
and happening onshore.
Mr Jenkins: Yes.
Q36 Mr Weir: Does that mean the companies
have started to scale back their investments, and how do you see
that trend over the next couple of years?
Mr Jenkins: Alan has already quoted
that his company is probably not going to drill any wells this
year. We have plans to drill wells because we farm out—are
you familiar with that term? We get companies in to share our
fiscal and technical risk, and they will pay a premium to get
into the well; so we have been fortunate enough to farm this out,
so our exposure as a company is quite low. Quoting from Oil and
Gas UK, there were 110 wells drilled last year in the North Sea;
this year there are 30 something wells that have got rigs; next
year it is 10. So we are seeing a drop-off of activity. We have
not had very many field development plan submissions; in fact
I cannot think, after Don and South West Don if we have had any;
so therefore no new fields are being developed.
Mr Millwood Hargrave: It is this
small, entrepreneurial end of the market, if you like, that has
provided a lot of the "get up and go" that has changed
the business over the last five or six years, and they are disproportionately
hit by this lack of either equity or—
Q37 Mr Weir: There is going to be
a significant downturn in the amount of exploration and work in
the North Sea if this continues: is that fair comment?
Mr Booth: Absolutely fair comment,
yes.
Q38 Mr Weir: Scottish Enterprise
last week published a report on the supply chain for the North
Sea, which showed a rosy picture of the last few years of an increasing
supply chain and business. What impact will the downturn have
on that and the number of jobs in the North Sea? Is that going
to be significant?
Mr Jenkins: We have already seen
contractors laying off staff. As Alan previously said, there was
a great skills shortage, and now we are heading towards a skills
surplus. The oil industry is an integrated business—okay,
the oil companies provide the money to drill the wells and develop
the fields, but we need a robust supply chain to help us do that.
You are going to find links are being broken or weakened. It usually
takes the oil industry in the North Sea something like four years
to recover from a price-down.
Q39 Mr Weir: Obviously, there is
a problem with the banks lending; and the Government and the taxpayer
is in the driving seat of most of these banks now. What do you
think is the one thing the government should be doing to facilitate
investment in the North Sea and ensure that development continues?
Mr Jenkins: It is to make the
North Sea an attractive place to do business. At the minute, you
can spend your dollars in any basin in the world. Oil is priced
relatively the same throughout the world, so therefore the UKCS
has to be competitive, so that when companies are looking where
to spend their dollars they are going to choose the North Sea.
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