Opinion: Mark Williamson: The exit from the North Sea by Pricey Giant is a bad omen for the area.

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PREMIUMIUM

The Scottish energy giant SSE poured a bucket of ice-cold water as crude oil prices reached a nine-month peak last month, in anticipation of a rebound in the North Sea.

Since early November, the 40 percent increase in crude oil prices to around $53 a barrel has been fuelled by expectations that an effective coronavirus vaccine will be available worldwide by spring.

Although the increase in infection rates caused by the new variant has concerned traders, the efforts of Saudi Arabia to mitigate concerns that Opec+ members would too easily ease production restrictions have helped calm nerves.

Nevertheless, SSE has made it clear that it now has little appeal to the North Sea gas production market, of which it seemed not so long ago to be a major fan.

Last month, the Perth-based company ended its decade-long foray into the North Sea by agreeing to sell Viaro Energy for just £ 120 million of its portfolio accumulated in the region.

The move came after months in which, in response to the drop in oil prices caused by the coronavirus crisis, companies scaled back their North Sea investments. Brent crude is still selling at about $17 less per barrel than last January’s rate.

The price agreed to by SSE was so low that it drew publicity in the Region.

Credit Suisse analyst Mark Freshney noted, “Our TP (target price) falls 25p, reflecting this low valuation.” as regards the effect on SSE shares.

He noted that SSE had decided to maintain responsibility for the portfolio-related decommissioning costs of about £ 235m.

The consequences of the agreement for the oil and gas industry in the North Sea are sobering.

SSE’s sale portfolio consists of interests in fields expected to help the business secure gas for years to come and shield it from adverse movements in commodity prices.

These include the enormous Laggan-Tormore field west of the Shetland Islands, which in this largely unexplored area has fuelled hopes of a boom.

In Laggan Tormore, SSE saw so much promise that in 2015 it paid French giant Total about £ 670 million for a 20 percent stake in the asset. The business then absorbed part of the cost in 2016 of putting the discovery of Laggan Tormore into development.

SSE said it would book a profit on the Viaro-agreed contract. However, after commodity prices slumped because of the corona virus, the company reduced the value of its North Sea market by about £ 300 million last year.

The company decreased the portfolio’s value by £ 160 million in 2016, citing declining wholesale gas prices.

As a reminder, when oil prices plunged from 2014 to 2016, businesses working in the North Sea were in a deep downturn. This began after demand was far outstripped by production growth.

After choosing to concentrate on green power generation and related networks, SSE spent months attempting to sell its North Sea portfolio.

In January last year, the firm withdrew from the business of supplying gas and electricity to customers, handing its household supply business to Ovo in a £ 500 million contract.

Some might conclude that the agreement negotiated with Viaro smacks of hopelessness.

The agreed price signals that, to put it mildly, the demand for North Sea assets is small.

The fact that SSE has had trouble selling gas assets is likely to be especially alarming for sector observers.

Growing pressure from environmental campaigners to abandon exploration and development work has been faced by companies working in areas like the North Sea.

However, industry officials have emphasized the ability for gas to play a key role in the transition to a cleaner energy system. They assume that in place of more carbon-intensive coal, gas-fired power generation could be used to meet energy demand while developing the required renewable energy resources.

Those who believe that the growth and production of oil and gas in the North Sea will make a major contribution to the security of energy in the UK and to the economy can rely on the fact that SSE has finally found a buyer for its portfolio

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