Without an agreement on immediate action, the current crisis of confidence threatens to do irreparable harm to Scotland’s oil and gas industry
WHEN the history of North Sea oil is finally written it will be a remarkable tale of human endeavour, untold riches and tragedy. It will chronicle extraordinary feats of engineering as well as the sacrifices made to extract the riches beneath the stormy waters off the Scottish coast.
Fortunes have been made and numerous lives lost since BP’s Sea Gem rig struck gas in the West Sole Field in September 1965.
And now, nearly 50 years after that first find, Scotland’s oil and gas industry is in crisis.
The plummeting oil price saw hundreds of jobs go last week and threatens thousands more. Boom has not dissolved into bust quite yet, but many are asking whether it is time to start writing the final chapter of the great North Sea adventure.
A permanent decline of the off-shore industry would have huge implications for the jobs and businesses that transformed Aberdeen from a fishing port into the oil capital of Europe.
As the north-east of Scotland nervously contemplates the risks the oil industry faces, the political ramifications are being felt at Holyrood and Westminster.
“The uncertainty at this time is very worrying for the offshore workers and their families,” said Tommy Campbell, a trade union official with Unite the Union, based in Aberdeen.
“We shouldn’t lose sight of the fact that it is not just offshore workers that are affected by this. It is also workers in the onshore companies associated with the oil and gas industry. There is a sense of great concern.”
Campbell was speaking after a disturbing week. The falling oil price has been ringing alarm bells on the rigs, anchored hundreds of miles off-shore, in the oil companies’ on-shore operations and around the north-east economy at large for some time.
After the price fell to below $50 per barrel last week, the job losses that people were fearing became a reality – the inevitable consequence of a low price, caused by worldwide supply for oil outstripping demand.
On Thursday, the multinational BP said it would lose 200 onshore staff plus 100 contractors. The losses came around the same time that ConocoPhillips announced 230 jobs were to go from its British operation, taking its number of UK employees down to 1,400. Last week’s bad news continued when it was revealed that another 100 North Sea jobs were to go when Schlumberger announced that it intended to shed 9,000 people across its organisation.
Coming on top of the 250 job losses announced by Shell last year and the axing of 200 Aberdeen jobs by Chevron about the same time, last week’s events were a grievous blow.
The crisis triggered a political panic as the UK and Scottish governments attempted to grip a crisis which will cast a long shadow over the general election.
The falling oil price may have been welcomed by hard-pressed motorists, but for First Minister Nicola Sturgeon and the SNP, it has damaged their credibility.
Their opponents have been only too keen to point out that the price of oil has dropped to more than half of the $110 a barrel estimate upon which the Scottish Government built its case for independence.
Ever since the 1970s, when the SNP coined the phrase “It’s Scotland’s Oil”, taking ownership of the North Sea has lain at the heart of its case for independence.
A few months before the referendum, Alex Salmond predicted a “second oil boom” when he produced a Scottish Government oil and gas bulletin forecasting production in Scottish waters could generate up to £57 billion in tax revenue over the next six years, compared with an estimate of £31bn by the independent Office for Budget Responsibility (OBR).
Now, however, with economists warning that an oil price recovery could take years, and with more job losses on the horizon, the SNP’s pre-referendum promise of an oil boom looks especially hollow.
With the SNP energy minister Fergus Ewing conceding this was “the most serious jobs situation Scotland has faced in living memory”, the pro-UK parties’ argument – that oil is too volatile a commodity on which to base an independence dream – is hard to ignore.
The falling oil price has dealt Sturgeon a bad hand, which she has made worse by not playing it terribly well. Perhaps unwilling to draw attention to flaws in the SNP’s economic argument, she has looked off the pace when dealing with the crisis.
It is easy to imagine her predecessor, Salmond, basing himself in Aberdeen and announcing various initiatives in an attempt to soften the impact of the oil price fall.
Sturgeon, however, appears only to have woken up to the issue within the past few days when she announced a task force to support threatened jobs and called on Prime Minister David Cameron to offer immediate tax breaks to oil companies.
In Sturgeon’s defence, it can be pointed out that her power over the oil industry is limited as that aspect of energy remains under Westminster control.
She is also of the view that Scotland’s oil wealth has been squandered by the UK parties, claiming forcibly that an oil fund should have been established in Scotland to cushion the industry against shocks.
Her opponents, however, have found it hard to conceal their glee when arguing that it is just as well that the oil industry is supported on the shoulders of the UK, which are broad enough to absorb the current crisis.
It is here that the new Scottish Labour leader, Jim Murphy, believes he can make political capital.
While it may seem harsh to try to capitalise on a price crash, politics is a rough old business and Murphy has made no secret of his willingness to use the North Sea situation to hammer the SNP.
In this regard, he is determined to use Salmond’s pledge to campaign for home rule at the May general election to his advantage.
Salmond’s vision of fighting for a constitutional settlement that would give Holyrood control of everything save defence and foreign affairs helps Murphy’s portrayal of the former SNP leader as a back-seat driver.
More importantly from a North Sea oil point of view, it has enabled Murphy to warn that Salmond’s home rule vision would create a Scottish economy that would be over-reliant on the vagaries of the oil price.
Last week saw Murphy accuse the SNP of wanting to walk away from the security of the Barnett Formula and a constitutional arrangement that shares risks across the UK.
According to Murphy, battling for a new settlement that would tie the fortunes of the Scottish economy to the oil industry would be foolhardy in the extreme.
That’s why there was much nodding of pro-UK heads when the governor of the Bank of England, Mark Carney, declared last week that the drop in oil price was a “negative shock” to the Scottish economy – but one which had been “substantially mitigated by the fiscal arrangements in the UK”.
Murphy was also out of the blocks quicker than Sturgeon when it came to putting pressure on the UK government to create tax breaks for the oil industry.
Calling for an oil summit, Murphy hot-footed it to Aberdeen before Sturgeon, who finally made it to the Granite City on Wednesday. It was only at the end of last week, after a torrid First Minister’s Questions, that she wrote to Cameron calling on him to reverse the supplementary charge on oil profits.
Her other suggestions included an investment allowance to provide support for fields that are expensive to develop and a tax credit to stimulate exploration.
In the meantime, the UK Energy Secretary Ed Davey flew to the north-east to announce that Andy Samuel, the head of the new Oil and Gas Authority, would lead a commission looking at the way forward.
But to those at the sharp end, it is action rather than politicking that they want to see.
“It serves no purpose whatsoever looking back – absolutely none,” said Sir Ian Wood, the Aberdeen-based entrepreneur, who built up the Wood Group to be one of Scotland’s most successful businesses.
Speaking to Scotland on Sunday he said: “I have always felt the industry is in a better position as part of the overall UK. But that’s not the point right now. The point is that it is part of the overall UK and Scotland is a very major stakeholder in the oil and gas industry in terms of jobs and everything else. I would hope that the politicians would actually think ahead: what do we actually have to do to get the oil industry into better shape.”
According to Wood, firm action is needed immediately. If nothing is done and the current situation continues for the next nine months to a year, he believes that 10 per cent of the 375,000 UK oil jobs could be at risk.
“The most important thing right now is creating a bit of stability,” Wood said.
He admitted that with oil being sold in the region of $45-$50 a barrel, tax breaks would have little impact in the short term, because at the current price companies were not making enough money to pay the supplementary tax on profits.
Despite this, he said, the UK government should cut the levy by at least 10 points urgently – before Chancellor George Osborne’s March budget. The tax break should be accompanied by a pledge that the reduction would continue into the future.
That would give oil companies an incentive to ride out the rough times.
“We have got to get the operators in a position where they can see a good enough reason to really stick in, hunker down and see their way through this – stay with the North Sea and invest in the future. The benefit of introducing a significant tax reduction now would only work if you make it clear we will maintain this tax regime into the medium term future,” Wood said.
“So when people now are planning shut-downs and are planning what to do with their engineering teams that [will ensure that] they keep these together. That is going to depend on their judgment as to what it is going to look like in the future.
“There is a crisis of confidence, but any talk of the demise of the oil and gas industry is nonsense. But what is possible is irreversible damage such that we won’t be able to maximise the recovery over the next 20-30 years.”
Wood added: “We will come out the other side, I would guess in about from nine months to a year-and-a-quarter we will be back up to $75/80 oil. By then these guys will have said to themselves it was worth seeing our way through this and it is worth looking at forward investment.”
As for the oil price itself, any recovery depends on supply and demand.
“For the next few months it is difficult to see the price coming up much and it could even go down,” said Alex Kemp, professor of petroleum economics at Aberdeen University.
Kemp said supply would be boosted by the continued growth in production in America with its booming shale oil and gas industry this year and even next.
Also, there have been repeated statements from Opec – the body representing 12 mainly Middle Eastern oil exporting countries – that it does not intend to cut production and wants to keep its market share. Meanwhile, demand has been hit by slow growth in China and the Eurozone.
“If you have that along with hardly any or small growth in world demand and American production increasing quite significantly, the inevitable consequence is that there is some downward pressure on the price,” Kemp said. “Later on in the year the market might improve, demand might pick up a bit more. But there are a lot of ifs and buts.”
Those “ifs and buts” are being anxiously watched by the oil companies and by the 150,000 or so people in the north-east of Scotland who depend on the industry for their jobs.