Optimistic outlooks for Scotland’s oil and gas sector but global uncertainty continues to overshadow return to growth - Grant Thornton

While the multitude of influences on the oil & gas market have never made life straightforward for those in the industry, the current geopolitical environment appears particularly uncertain.

Supply side dynamics are currently subject to a host of complex issues.

The recent modest increases in production agreed between OPEC and non-OPEC producing countries were against a backdrop of conflicting political aims and domestic budgetary needs – only time will tell how long agreement can be maintained.

The pending re-imposition of US tariffs on Iran looks likely to severely restrict its exports given the hold that the US banking system has over dollar clearing, even if parties such as the European Union do not support the action.

Meanwhile, the fragility of supply volumes from countries such as Venezuela, Libya and Nigeria because of domestic problems are also a concern.

Each of these factors has added to upward pressure on the oil price, outweighing the risk posed by downside pressure on demand growth – downward pressure however that may increase if trade wars escalate because of the current US government’s approach to raising tariffs.

There are then the ever present concerns over Europe’s energy dependency on Russia given the latter’s deteriorating relations with the West – something that is seen by the US as a security issue for its European allies but also a trade issue as it looks for buyers for LNG exports from its shale developments.

Given these global uncertainties it would appear more important than ever for the UK to maintain a robust and successful offshore industry to prolong the development of the UKCS. The market in the UK is certainly seeing improving conditions and increasing confidence.

New PE backed players are seeking to adopt leaner and more efficient business models – with the key being to learn the lessons of the downturn to ensure sustainable competitiveness of the UK basin and its attractiveness to investors. The effect of this will be to maintain the UK, and specifically North East Scotland’s position, as a centre for innovation and cutting edge technology in the global offshore market.

Ian Knott, Aberdeen-based director of corporate finance at Grant Thornton UK, said: “Whilst it has become something of a cliché, describing the mood in Aberdeen as one of “cautious optimism” is not necessarily inaccurate. We are undoubtedly seeing an overall rise in activity even if this is not consistent across all subsectors. The landscape is still shifting, with new players now making bold moves as the larger multi-nationals continue to mull over their long-term strategy in the region.

“Undoubtedly the international political environment could create future challenges that Scotland and the rest of the UK cannot control. Competing international political and economic drivers will continue to make future market conditions difficult to predict but if the industry can maintain the discipline and drive for innovation that it has had to adopt over the last few years it should continue on the path to recovery.”