Mon, Jan 26, 2015 - Page 15 News List

Plunging prices threaten British oil industry

NO MORE CASH COW:Analysts said that without tax breaks, major producers might abandon North Sea oilfields in favor of areas where the cost of extraction is lower


With oil prices falling and aging 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 seen crude oil prices decline by more than 50 percent since June last year to less than US$50 a barrel.

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

Others, including Royal Dutch Shell PLC and Chevron corp, warned late last year of similar scale cuts.

The publication of major oil producers’ financial results in a few weeks could bring more bad news, with British subcontractors particularly nervous that they could be deemed expendable.

In anticipation, Aberdeen-based oil services company Wood Group has already cut staff salaries by 10 percent.

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

“We’ve seen oil prices fall in the past and it has recovered,” Subsea UK chief executive officer Neil Gordon said. “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 magnified the existing problem of high operating costs in deep offshore fields, with producers desperate to trim budgets even when prices were higher.

Faced with dwindling margins, major oil producers are beginning to think the unthinkable — abandoning Scotland’s oil and gas fields, which have seen a 50 percent fall in production over the past decade.

The BP-owned Forties oil field produced about 500,000 barrels per day at its peak, Simmons & Company International chief executive officer Colin Welsh said. Today, the combined production of all Britain’s North Sea fields is estimated at 800,000 barrels per day.

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

The government for too long has treated the oil industry as a “cash cow,” said several officials who highlighted the 60 to 80 percent 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,” Plexus Holdings PLC finance director Graham Stevens said. “We don’t get that kind of money in the UK.”

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

“This is a vital industry,” Labour Party shadow chancellor of the exchequer Ed Balls said. ”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.”

British Prime Minister David Cameron has promised to include support measures in its budget for the 2015-2016 fiscal year, which is to be presented in March.

However, in Aberdeen, concern is growing that there might 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,” Member of Parliament for Aberdeen South Anne Begg said.

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