Tuesday 03 January 2017 4:00 am

Oil price slump pushes UK oil and gas sector insolvencies to five-year high

The oil price slump drove insolvencies in the UK oil and gas sector to a five-year high in 2016, according to accountancy firm Moore Stephens.

There was an eightfold increase in the number of companies that collapsed last year, from two in 2015 to 16 in 2016. In 2014, six companies folded, compared to just one in 2013 and none in 2012.

"The collapse of the price of oil has stretched many UK independents to breaking point," said Jeremy Willmont, head of restructuring and insolvency at Moore Stephens.

The last 15 years has seen a large increase in the number of UK oil & gas independents exploring and producing everywhere from Iraq to the Falkland Islands. Unless there is a consistent upward trend in the oil price, conditions will remain tough for many of those and insolvencies may continue.

Oil and gas sector insolvencies have increased around the world ever since oil prices nosedived from more than $100 a barrel in 2014 to average at around $50 a barrel for most of last year.

The spike is by no means unique to the UK – in North America, 48 oil and gas companies filed for bankruptcy between January and July last year, according to data from Haynes and Boone LLP.

However, smaller North Sea operators face "particular stresses", such as decommissioning costs and lack of capital investment, when compared to other companies in other countries.

“North Sea oil producers face further headwinds from decommissioning costs of offshore rigs – that’s a very significant headache for companies that are already financially strained," said Michael Simms, oil and gas partner at Moore Stephens.

"The relatively stable political environment that North Sea investment benefits from is offset by the higher costs of production."

The benchmark oil price, Brent crude, rose more than 50 per cent last year in the largest annual gain since 2009. It ended the year valued at more than $56 a barrel.

Market analysts are optimistic deals to cut production among the world's most important oil cartel, Opec, and with other oil-producing countries will boost prices to perhaps as high as $60 a barrel in the first quarter of the year.

At the end of November the Organisation of the Petroleum Exporting Countries agreed to cut its daily production by 1.2m barrels per day (bpd) from 1 January.

In mid-December, this was bolstered by another deal with non-Opec countries, led by Russia, which agreed to shave 558,000 barrels off their daily output.

Opec will meet on 25 May to monitor the progress of its deal, which is aimed at plugging the world's huge supply glut.