The Budget may have helped the struggling oil and gas sector, but driving down costs is key to staying afloat, finds Gareth Mackie
HAVING been thrown an “essential lifeline” by the Chancellor in last week’s Budget, the oil and gas industry – which supports some 450,000 jobs – needs to drive down costs to stay afloat, argues the boss of explorer Faroe Petroleum.
Graham Stewart, who was instrumental in founding the Aberdeen-based company in 1998, says standardising equipment would help to push through “massive” cost reductions in an industry that has been battered by the fall in crude oil prices.
“In the North Sea, nothing fits anything else,” says Stewart on a visit to Edinburgh for the annual dinner of the Scottish Oil Club. He says that, in the 1990s, contracts and supply chain were simplified through an initiative called Crine (cost reduction initiative for the new era). But it didn’t succeed in standardising kit such as wellheads and “Christmas trees”, the complex systems of valves that are attached to wells to control the flow of oil and gas.
“There’s a lot of inefficiency and the costs have been allowed to rise, not for any other reason than they got away with it,” Stewart says. “There wasn’t enough pressure to hold those costs back. Now the pressure is vicious.
“If the oil price stays low, which it’s possible it will do, the only way the North Sea is going to be able to make money is if the costs are much lower than they are today.”
Hundreds of jobs have already been axed amid the slide in Brent crude prices, which have halved since last summer, and thousands more remain at risk, but industry leaders believe the outlook would have been much more bleak had George Osborne not announced a £1.3 billion package of tax breaks on Wednesday. Delivering the Budget, the Chancellor said the UK government would reduce petroleum revenue tax from 50 to 35 per cent next year to encourage investment in older fields, while the supplementary charge on ring-fenced products was immediately cut from 30 per cent to 20 per cent.
Sir Ian Wood, who led a government-commissioned review into squeezing the most out of the UK continental shelf, says Osborne’s reduction in the petroleum revenue tax and supplementary charge “undoubtedly improves the viability of a significant number of potential field developments and should get new field investment flowing as the oil price recovers”. He adds: “I believe the Budget does provide the essential lifeline from Treasury to enable industry to start rebuilding confidence and investment in the North Sea. There will undoubtedly be job losses as the industry works its way through a very difficult price reduction, but these should be in the 5,000 to 10,000 range out of the 380,000 current jobs, and very significantly less than would have occurred under the previous fiscal regime.”
Wood had previously warned that up to 100,000 North Sea jobs could have been lost over the next two to three years. His review last year, called for greater collaboration and co-operation to drive down costs and improve output, and that view is shared by Ross Martin, chief executive of the Scottish Council for Development & Industry.
“You’re more likely to get innovation when you have co-operation. Scotland has caught up with the UK average – it used to be between 6 and 10 per cent behind, but since devolution that has changed,” Martin says. “Nevertheless, the UK average is still 20 per cent below OECD competitors, so we have a way to go. There is a real need to look at different solutions, so we support the UK government on its decentralisation agenda and the Scottish Government in terms of bringing together social and economic policy.”
Angeliki Terpou, energy economist and research fellow at the Centre for Policy Studies, says the fiscal regime for the exploration and production of oil and gas had been “in dire need of reform”, adding: “Tax revenues have collapsed in recent years despite much higher tax rates and oil output has continued to fall. Meanwhile, Brent crude oil prices have fallen by about half over the last nine months.”
North Sea production has fallen by an average of 7.8 per cent each year since 1999, and Stewart says much of this can be blamed on a lack of investment in existing infrastructure. “Many fields are producing at 40 or 50 per cent uptime, because many owners are doing other things with their money.”