Plunging prices threaten UK's 'cash cow' oil industry | Fin24
 
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Plunging prices threaten UK's 'cash cow' oil industry

Jan 25 2015 11:30

London - With oil prices tumbling and ageing equipment making extraction ever more expensive, Britain's North Sea oilfields face a struggle for survival, threatening a vital source of income and energy.

The oil industry has been hard hit by crude prices falling more than 50% since June to less than $50 a barrel.

Energy giant BP recently announced it was cutting 300 local jobs, mostly in the Scottish city of Aberdeen, Britain's oil "capital".

Others, including Shell and Chevron, warned late last year of similar scale cuts.

The publication of the oil majors' financial results in a few weeks augurs more bad news, with British subcontractors particularly nervous that they may be deemed expendable.

In anticipation, oil services company Wood Group has already cut staff salaries by 10%.

The industry has ridden out previous fluctuations, with prices dropping as low as $38.37 per barrel during the depths of the global economic crisis in 2008.

"We've seen oil prices fall in the past and it has recovered," said Neil Gordon, chief executive of Subsea UK.

"There is confidence that it will recover, but that you'll have to go through an amount of pain, until the price recovers."

The recent price fall has only magnified existing problems of high operating costs in the deep offshore fields, with producers desperate to trim budgets even when prices were higher.

Faced with dwindling margins, the majors are beginning to think the unthinkable - abandoning Scotland's oil and gas fields, which have seen a 50% fall in production over the past decade.

The BP-owned "Forties" field, which celebrated its 50th anniversary this year, produced around 500 000 barrels per day (bpd) at its peak, according to Colin Welsh, CEO of the investment bank Simmons & Company.

Today, the combined production of all Britain's North Sea fields is estimated at 800 000 bpd.

'Vital industry'


"They'll have to make the North Sea a lot more attractive, and that involves reducing the tax rates," said Welsh.

The government for too long has treated the oil industry as a "cash cow", argued several officials who highlighted the 60% to 80% tax rates levied on oil companies.

"If you look at Norway, they get very significant tax breaks for drilling exploration wells, which encourage them to deploy that money to do another one and another one," said Graham Stevens, finance director of Plexus, which specialises in wellheads.

"We don't get that kind of money in the UK."

With Britain's general election just months away, politicians have recently been much more keen to show support for the North Sea, particularly in Aberdeen where more than half the jobs depend on oil.

"This is a vital industry," insisted Labour's Ed Balls, who would likely become Britain's finance minister if his opposition party wins the nationwide vote.

"Labour... will do what it takes to make sure we secure the jobs and the investment, which is so important for livelihoods... but also for tax revenues coming in," he added.

The Conservative-led government of Prime Minister David Cameron has promised to include support measures in its budget for the financial year 2015-2016, which will be presented in March.

But in Aberdeen, concern is already growing that there may be no industry to revive if prices remain low for any length of time.

"We need to make sure the industry is still in a fit state to recover," said Anne Begg, MP for Aberdeen South.

For Jake Molloy, regional organiser of the RMT Union, "it is a very serious situation that Westminster need to address, not only for Aberdeen but for the UK economy".

In 2013-14, tax revenues fell by a quarter to $4.7bn due mainly to lower production. With prices at $50 a barrel, the wells could soon run dry.

oil price  |  oil
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