Cost benefits

There was an interesting aside in an otherwise routine trading update this week from UK independent Serica.  It said operating costs at the Erskine condensate field in the UK North Sea are averaging well below its guidance of $20/bl of oil equivalent (boe), thanks in no small part to the pound’s lower exchange rate against the dollar.

The pound is under pressure from the UK government’s perceived vague approach to the pressing issue of Brexit. Money markets thrive on political uncertainty at the expense of sovereign currencies — see also this week’s rout in the Turkish lira for proof that if momentum gathers, even positive data points cease to hold any meaning.

But a pressured currency can be a good outcome. Just ask George Soros, who netted $1.5bn in a month when the UK was forced to leave the European exchange rate mechanism, the precursor to the euro, in 1992. The pressure on the pound from Britain’s forthcoming exit from the EU has come at a fine time for those pumping oil in the UK North Sea. Income is banked in the stronger US dollars, the global oil currency, while costs are covered in pounds, creating an instant gain. And costs are already down. Way down.

The average unit operating cost offshore the UK will fall to $16/ boe in 2016, from a peak of $29.30/boe in 2014, according to industry body OGUK. These costs are likely to fall further in 2017, although the decline may be muted, with many benefits already in place.

The UK’s offshore sector will still be wrestling with dwindling profit margins, but the pound’s depreciation may jump-start merger and acquisition activity. A weaker currency means there may be bargains – with private equity firms waiting in the wings

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