Bill Jamieson: We can’t ignore oil price collapse

OF ALL the economic policy responses in Scotland this year, the formation of a new economic development agency for the North-east can fairly rank as among the most significant.

HMRC figures show that offshore corporation tax receipts for April to September were only £203m compared with a six-monthly peak of £3.3 billion in 2011

The existing Aberdeen City and Shire Economic Future (Acsef) is to be scrapped. It will be replaced by a new body run by businessman Sir Ian Wood.

It is a direct result of the massive and continuing fall in the price of oil and the shockwaves this has sent through the economy of the region.

He has pledged £25 million of his family’s money to the new Opportunity North East (One). And there are pledges of matched funding from other bodies including Scottish Enterprise to take the prospective total to £50m.

This is a brave recognition of the longer-term challenges posed by the dramatic fall in the oil price. And it is wholly to be welcomed.

So sudden and dramatic was the fall in the price of Brent crude – from $115 a barrel in mid-2013 to $82 last October – that the immediate reaction was to treat this as little more than a freak event that would “correct” in due course.

And there was notable political reluctance to view it as anything other than temporary. Indeed, far from the Scottish Government leaping into “rapid reaction” response there seemed to be a marked resistance to recognise the impact on its North Sea oil tax revenues: the administration finally sneaked sharply downgraded figures out this summer.

Meanwhile, the oil price, with brief interruptions, has kept falling. Today it stands below $44. Far from this being seen as the floor, consensus predictions see the price weakening further and likely to remain weak until the spring and summer of 2016.

For the Aberdeen area it has brought an epic challenge. The region now has to configure a new economic future. The price collapse has brought major cutbacks and reductions in exploration and investment spending. Oil & Gas UK says capital spending in the North Sea could drop by £2bn to £4bn each year for the next three years. Spending on the search for new oil and gas reserves could be cut by more than two-thirds. And banks may no longer be as willing to provide producers with the credit to get through the downturn.

Analysis by oil consultancy Wood Mackenzie in September predicted that 140 of the 330 fields in the UK North Sea may close in the next five years, even if the price of oil returns to $85. Recent figures showed up to 65,000 jobs have been lost in the UK since the price collapse.  

It has also hit the wider onshore service sector, from component suppliers to specialist engineering services, property prices and the retail, hotel and leisure sectors.

For the government it has brought a revenue collapse. North Sea tax receipts have plunged into the red for the first time in the sector’s history. HMRC figures show that offshore corporation tax receipts for April to September were only £203m compared with a six-monthly peak of £3.3 billion in 2011. Petroleum revenue taxes for those six months stood at minus £242m, compared with periods where PRT raised £577m in a single month.

For the SNP the political impact will look even more dire when John Swinney presents the Scottish Budget on 16 December. Previous sanguine projections showing a shrunken Scottish budget deficit once Scotland’s share of North Sea revenues were taken into account will provide little comfort now.

The recent Oil & Gas UK report does offer some silver linings. The UK Government cut taxes earlier this year to help make the contraction less severe. And companies are pursuing cost savings: North Sea operators could achieve a 22 per cent (or £2.1bn) reduction in the cost of operations by the end of 2016.

However, were the oil price to stay below $50 a barrel for any prolonged period, many fields will be uneconomic to operate, never mind develop further. And the outlook does not look good.

Last week saw the tenth straight week of reserves increases in the US at a time when domestic stockpiles are at an 80-year high and full tankers are queuing up at ports. The US Energy Information Administration also reported that US output grew slightly to 9.2 million barrels, confounding expectations that low prices would have reduced shale production.

Last week optimists clung to hopes that Saudi Arabia would agree to a production cutback at the latest Opec meeting to ease the global supply glut. But even if this slim prospect were to prevail, the global market would have to contend with Iranian export increases when sanctions are lifted – a key reason that many analysts believe the oil market may not yet find a firm floor until the first half of 2016.

Meanwhile, a survey of US analysts and investors found only 21 per cent believe the oil price bottomed out this year. The largest share, 46 per cent, reckon the market will bottom out in the first half of 2016, when Iranian production will return to the market. Some observers have openly discussed prices falling as low as $20 a barrel.

That is a daunting prospect. And it would take a major geo-political upset such as war in the Middle East for the price to regain $80 a barrel.

This is why the initiative of Sir Ian Wood makes sense, and for policy emphasis to fall on diversifying oil and gas and promoting tourism, food, drink and life sciences if the region is to have a sustainable economic future. Sir Ian might usefully have added a call for Holyrood to lift its crackpot moratorium on shale development in Scotland. But for that we will have to wait until a wider downturn is upon us.