‘North Sea oil cuts are putting future at risk’

Crucial exploration for new oil and gas fields has plummeted by 90 per cent from the levels needed to “achieve a future” for the North Sea, industry leaders have warned.

Picture: HeMedia
Picture: HeMedia

BP is today expected to become the latest energy giant to reveal plans for billions of pounds worth of cuts as a result of the dramatic fall in global oil prices.

A special one-day conference to address the North Sea crisis took place in Aberdeen yesterday, and it heard the clearest hints yet that tax breaks will be delivered in next month’s Budget to help kick-start the beleaguered industry and boost exploration.

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First Minister Nicola Sturgeon and Scottish Secretary Alistair Carmichael joined a range of industry chiefs and experts at the event in the city’s exhibition and conference centre.

Most of the North Sea’s major players have already laid off staff and slashed wages.

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Malcolm Webb, chief executive of Oil & Gas UK, said: “We’re in a dreadful position on exploration wells at the moment. I mean, how many are we going to drill this year? Eight? Ten? I don’t think it’s going to be 15.

“Fifteen is ridiculously low. The exploration wells we need to be drilling should be 80 to 100 each year if we really want to achieve a future for this basin.”

Mr Webb said exploration “fell off a cliff” when supplementary corporation tax was increased to 62 per cent.

“A move there is going to help,” he added. “You have got to give the industry a reason to persevere through this and believe that if they do find something – and it’s quite right that what we are finding are smaller pockets now – that there is something worth going for in economic terms.”

It is now feared that swingeing cuts will put a stranglehold on North Sea exploration and new discoveries of oil and gas, resulting in irreversible damage even when the price recovers.

BP will set out its annual results today and it is expected the £15.3 billion spent on major projects last year will come down.

Royal Dutch Shell last week said it would cut £10bn from its spending plans over the next three years as it responds to sliding oil prices.

Andy Samuel, head of the new industry watchdog, the Oil and Gas Authority (OGA), also attended yesterday’s conference and said there will be “many solutions” to the industry’s problems.

He said: “We have got to understand why we aren’t currently getting the success that the Norwegians, for example, have been enjoying, including in some quite mature areas.

“I think a key part of that has been they take a very regional, data-driven, scientific approach, and I very much intend that the OGA will do that if nothing else.”

Mr Samuel added: “Clearly I think there are many solutions. Tax will be part of it, and there are some good conversations ongoing.

“There will be new seismic [exploration] that we support through government, but I think we need to do a lot more than just that.

“As we get more efficient and can drill these wells cheaper and more efficiently, that’s going to help.”

Oil prices have plunged from around $110 a barrel last summer to less than $50 a barrel recently. But prices rallied yesterday as investors speculated that the falling cost of crude may have ended. Brent crude was up 1.3 per cent at $53.65 a barrel, having reached $55, while US oil rose 1.7 per cent to $48.52.

Although falling prices are good news for motorists at the pumps, they have had a devastating impact on one of Scotland’s biggest industries.

Oil and gas is worth £35bn annually to the UK economy, but a recent Scottish Parliament ­report suggested the current crisis could see 15,000 jobs axed out of the 200,000 posts based north of the Border.

Mr Carmichael said changes are coming in next month’s Budget, but he added they may not be as “dramatic” as some might wish.

“I’m avoiding using the word dramatic, because then whatever comes forward it’s pretty certain that the consensus will break down and it will never be dramatic enough,” he said.

“But we do understand that this is a downturn like no other.”

Industry leaders and Labour and SNP politicians have been urging the UK government to introduce tax cuts urgently to help the North Sea.

Ms Sturgeon said the sustained exploration in Norway recently is a result of the country’s tax breaks. She said it was a “very challenging time for the industry”.

“I think it is very important to be clear that the North Sea oil and gas industry has been, is, and, I believe, will continue to be a significant asset for Scotland and the Scottish economy,” she said.

“But it faces a challenge at the moment and that means it is incumbent on all levels of government to work together to provide the industry with the support it needs at this time.”

The First Minister said the Scottish Government would produce a new analysis of the impact of falling oil prices on the economy. However, she said this could not take place until after changes expected to the tax regime are announced in next month’s Budget.

Alex Kemp, professor of petroleum economics at the University of Aberdeen, said: “The case for an exploration tax credit now that we are at $50 rather than $100 is clearly now much stronger, because smaller companies will have difficulty raising finance and they are often the explorers.

“So the case for a refundable tax credit, like in Norway, is stronger now than it was at $100.

“When I talk to our Norwegian counterparts there is a unanimity that the refundable tax credit has increased exploration substantially, and more importantly has increased the number of discoveries – some of which are commercial.

“It will be interesting to see to what extent the low exploration is down to the very high costs of the drilling, or maybe there is not much there.

“We may get an answer in the very near future.”