One of the most important but battered areas of Britain's economy is going to finally turn around this year

North sea oil1GettyA general view of the BP ETAP (Eastern Trough Area Project) oil platform in the North Sea.

Operators in the North Sea oil are finally going to be making money again, according to industry trade body Oil & Gas UK.

The North Sea oil industry is one of the jewels in the crown for Britain’s economy but a crash in the oil price from June 2014 — from triple digit highs to near $US20 per barrel at one point — dwindling reserves, as well as the costly issue of decommissioning, have all hurt the sector.

However, it looks like energy companies that explore and produce in the North Sea will generate positive free cash flow in 2017 — the first time in four years.

Free cash flow (FCF) is a vital measurement to a company’s financial performance. It shows the company’s ability to generate cash after spending money to maintain or expand its asset base by calculating operating cash flow minus capital expenditures.

Oil & Gas UK says that all energy companies operating in the North Sea are expected to generate £5 billion of FCF in 2017. However this is dependent on oil prices rebounding at the same rate as current levels. 

Oil & Gas UK Chief Executive Deirdre Michie said in a statement that while this is positive, there are still huge challenges for the sector (emphasis ours):

“Confidence is slowly returning to the basin,. The revival is led chiefly by exploration and production companies which may collectively see a return to positive cash-flow for the first time since 2013, provided costs are kept under control and commodity prices hold. However, this is unlikely to translate immediately into reinvestment or increased activity.

The challenges for the basin ahead, particularly for companies in the supply chain, are still considerable.  As one means to help address this, Oil & Gas UK is asking the Treasury to extend the investment allowance to operational activities that are focused on maximising economic recovery.

“While the reduction in headline tax rates of recent years has helped create one of the most competitive fiscal regimes for upstream investment, certain adjustments are still required to drive investment over the longer term.”

The North Sea oil and gas industry has generated £330 billion ($US407 billion) in tax revenue over almost fifty years. However, over the last few years, revenues have been dwindling:

Meanwhile, oil prices have also cratered over the last few years, falling from over $US100 per barrel in June 2014, to now around $US50 per barrel. At one point last year, oil crashed to nearly $US20 per barrel.

 

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