A spike in the number of oil and gas insolvencies is giving energy experts cause for concern as dozens of new development projects planned for the North Sea and Europe risk being shelved.
The number of insolvencies of UK oil and gas service companies has trebled in comparison to figures for each of the last four years. 18 businesses have become insolvent in the 12 months to 30 September, compared to just six the year before.
This instability, caused by plummeting crude oil prices, is creating financial stress across the sector and has prompted many of the world’s leading oil companies to scrap their investment plans.
Insolvencies could be the tip of the iceberg
Insolvencies in the sector have been rare over the last five years, helping to paint a picture of general financial stability in the industry threatening insolvent liquidations. This has made it all the more surprising that the recent price drop has translated so quickly into business distress.
The prices of crude oil have dropped considerably, falling from a high of more than $110 a barrel in the summer, to just over $60 today. The slump has also accelerated in the past couple of months, giving experts reason to believe the recent insolvencies could be the tip of the iceberg.
A spokesperson for Moore Stephens, the accounting firm that produced the report, said: “The fall in the price of oil has translated into insolvencies in the oil and gas services sector remarkably quickly.
“The oil and gas services sector has enjoyed very strong trading conditions for the last 15 years, so perhaps it is not quite as well prepared for a sustained deterioration in trading conditions as others sectors seem to be.”
A prolonged price drop
There are concerns in the industry that despite a reduction in the cost of oil during the financial crisis, this price depression could last a lot longer.
Major oil companies have already started to take action to protect their positions. BP and Shell have announced substantial cutbacks to proposed investments in a number of projects over the coming months, while many smaller operators are reconsidering their spending programmes to keep capital in the business.
The result of the cutbacks will be less work for oil and gas companies, which could strangle cash-flow and lead to further insolvencies as we enter 2015. It is anticipated those firms working on harder-to-extract deposits will be in the firing line as much of their work becomes uneconomically viable.
35,000 jobs could be lost
A report has identified that the level of investment cutbacks in the European oil and gas industry could equate to £55 billion of work. The industry trade body, Oil and Gas UK, predicts this will result in the loss of 35,000 jobs.
The consultancy group, Wood Mackenzie, has warned the projects most at risk are those in the North Sea, the Mediterranean and across continental Europe, as they operate with a breakeven price of more than $60 a barrel.
This bleak outlook for the industry has caused company valuations in the sector to plummet, with analysts expecting to see an increasing number of takeovers of smaller operators in the coming months.
Oil and gas companies have been one of the UK’s biggest success stories in recent years. Now firms facing a real risk of insolvency and administration should look at the possibility of restructuring their businesses before it’s too late.
Please call 08000 746 757 for a free, confidential discussion of your circumstances and to learn more about the business restructuring solutions available to you.