Scotland has benefited enormously from the huge oil wealth produced by the people of Aberdeen and the north-east. Over 40 years, 42billion barrels have been taken out of the North Sea by an oil industry that worked out of Aberdeen and Peterhead. And over many years in visits to Aberdeenshire to see my parents, or simply to visit the industry, I have seen how the skills developed in the north-east have boosted the British economy and kept the country ticking through thick and thin – and in decade after decade – since oil was first discovered. Over 30 years oil, has averaged around 17% of the Scottish economy. But now in a year when oil prices have fallen 40%, we face what is more than a normal trough in the oil production cycle as some of the industry’s great experts, Sir Ian Wood and Lord Browne, formerly of BP, have recently reminded us. The fall in world oil prices comes at a time when extracting oil from the North Sea is more challenging than ever and has brought us, earlier than we could have expected, near to a tipping point for the industry.
Oil and gas joint industry projects have made a significant contribution to technological progress over many decades, but as an industry we need to be more strategic to maximise UK production in the years ahead. Collaboration is the great buzz word of the moment and was a key theme of the Wood Review. It has been at the heart of what we do at ITF since we launched in 1999, at a time of low oil prices and operating challenges. A focus on collaborative efforts to get technology qualified, trialed and implemented in the field is particularly important for the industry at this time.
The “City Deal” being proposed for Aberdeen apparently consists of spending a massive £2billion on transport, housing and skills development. If such a deal is ever approved then Aberdeen City Council officials claim this will go a long way towards helping revive the oil & gas industry, the health of which is most certainly a cause for concern as would be the health of the entire economy of Aberdeen and Shire should there be a really prolonged downturn in North Sea and international activity. To put it bluntly though, such claims are utter nonsense and should be taken with a large pinch of salt. Investment in infrastructure does not itself impact directly on the economic or industrial prospects of a City or indeed a country. Why? Because infrastructure can only act as a means of attracting private sector or joint private and public sector investment in companies, jobs, technology and so on and so forth.
It is hard to believe that the North Sea oil & gas industry has been a part of the Aberdeen and north-east Scottish economy for half a century. From early tentative beginnings starting with Shell renting yard space in Torry and offices on Market Street it has become the linchpin and more besides for this city-region. Take oil out of the equation and our economy would collapse. There is no obvious sunrise successor, though maritime renewables could be made to work, if the oil & gas supply chain goes after the opportunity and Donald Trump is trumped over the European Offshore Wind Deployment Centre project. But really grabbing that opportunity is something it has been poor at, despite the efforts of Aberdeen Renewable Energy Group and the launching at the turn of the millennium of what became the very successful All-Energy show, but which was last year swiped by Glasgow in a manner that angers me still.
Cast your mind back to your awkward teenage years and your first school disco; that uncomfortable rite of passage with boys on one side and girls on the other. It took insurmountable courage for someone to dig deep, walk across no-man’s land and ask someone to dance to the latest single from Wham. Too often, nobody stepped up to challenge the accepted tradition, despite perhaps wanting to. The situation was left to the bravery of two poor teachers who unashamedly put their best foot forward and eventually encouraged others to do the same. Fast forward to now. Our industry is at the unpredictable mercy of our economic circumstances and our collective efforts. It is standard practice to do anything that will prove our individual worth and value. Take, for example, our safety standards and guidance.
We've all read plenty of stories predicting the future of the oil industry, with endless questions like: What will the oil price be in six months? Will we receive a tax cut as an industry in the imminent budget announcement? When Will OPEC reduce production to reduce the surplus supply of oil and gas? So it may seem strange timing to talk about recruitment and investing in the future with universal cuts - but this is key to securing the industry for generations to come. The most frustrating factor of these unanswered questions is that we have very little control over the outcomes. For many, it is a tough and trying time as leaders have very little choice but to say farewell to long-serving staff in order to reduce their cost base. Having witnessed a dip in the industry before, one thing that always astounds me is how the cycles of recession and talent wars continue.
It's cold out there, it's always cold out there.... It seems like we are getting news of rate cuts and job threats every day at present. Our politicians seem to be on an endless loop exhorting collaboration, listening, unity and focus. Fans of the cult film Groundhog Day will be able to relate to Phil Connors in all of this. In that 1990’s classic our hero was repeating Groundhog Day over and over again. For the record, our much heralded Aberdeen Summit was held on Groundhog Day (2nd February).
Continually increasing costs, a sharp fall in the price of oil, a collapse in exploration and a slump in investment. You could be forgiven for thinking the end is nigh for the UK oil and gas industry. It is true that the main findings of our Activity Survey 2015 don’t make happy reading and risk giving credence to the doomsayers’ views that there is very little left to play for, that our industry is in decline and should be left to do just that.
BP chief executive Bob Dudley recently issued a dire warning, comparing the current oil bust to the one that devastated the oil and gas industry in the 1980s. I’ve made similar comparisons between the current price plunge and the ‘80s. The severity of the price decline during the past six months certainly reinforces the notion that we may be seeing the worst oil slump in 30 years. Other factors, though, occurring on the fringes of the oil market, hint at a different outcome than the 80s, which ended with the US becoming more dependent on cheap oil.
It’s no secret that the oil and gas industry has suffered some volatile times in recent months. The drastic drop in oil price has been, and continues to be a major focus for the world’s media.
By unveiling phase one of its plans for the Brent Delta this week, Shell has certainly propelled decommissioning into the headlines and consciousness of everyone, whether they’re directly involved with oil and gas or otherwise. By its very nature, North Sea decommissioning is a developing business that is new to many, and misinterpreted by even more. It’s important right now to make it clear that it is not about the premature closure of the North Sea oil and gas industry. In reality, decommissioning is a developing sector that is full of opportunity; the opportunity to win business and opportunities to problem-solve through innovation.
No matter where the oil price is going in the next 12-18 months, this must be the time for the industry to look afresh at the way it operates. For the reality is that while we in Aberdeen may hope for a bounce back of the Brent index, the rest of the world benefits from low oil prices: consumers save at the petrol pump, and industries on the balance sheet. All that creates an increase in GDP, spending power and new jobs, so what isn’t there to like about a lower price per barrel? The reaction of some parts of the oil industry to the recent fall in prices has been entirely predictable. Find cost reductions by setting a target or enforce a mandatory cut across the board. Regrettably, as a consequence, we have seen instant head-count reduction, which may seem good sense in the short term, but impacts company loyalty in the long term.
We are where we are, it seems, for the relatively long haul. Bob Dudley, of BP, says the oil price won’t rise much for two or three years. Goldman Sachs have dropped their three-month Brent prediction to $42 a barrel. And the Saudis said at the Davos Forum that around $50 was the most probable level for some time to come. So there’s not a lot of good news around. In these circumstances, the North Sea industry needs all the help and creative thinking it can get. The challenge of how to keep investment going has never been more acute. And, of course, it is shared by oil & gas producing territories throughout the world.
I suppose given that I’ve written previously about so many similar instances I really shouldn’t have been surprised when I read that an organisation called “Social Investment Scotland” was doing a deal to help fund a developer of low carbon projects install an Australian-developed micro combined heat and power unit (MCHP) on initially seventy but potentially up to three hundred and fifty properties across Scotland with a view to helping residents reduce their fuel bills. The company producing the MCHP is Ceramic Fuel Cells Ltd and according to their website they were spun out of the Australian Government's Commonwealth Scientific & Industrial Research Organisation (CSIRO), their corporate head office and research and development facilities are in Melbourne and they have a fuel cell assembly plant in Heinsberg, Germany, and a ceramic powder plant in Bromborough in the UK. So perhaps not surprised but just downright gobsmacked that once again we have let an international competitor steal a march on us in an important area of technology. It’s perhaps even more frustrating because I know that at least two of our universities have specific recognised expertise in fuel cell technology. In fact, a few years ago one tried to commercialise a ceramic fuel cell but as is often the case in Scotland, couldn’t get together the funding.
It seems that a measure of common sense has prevailed over the future potential fracking of shale gas & oil wells in the UK. After a failed attempt by a group of MPs to get a moratorium imposed on the practice under the Infrastructure Bill currently making its way through parliament, some sort of compromise position appears to be emerging. So long as the Bill isn’t derailed in the House of Lords, it looks as if the UK’s putative shale gas & oil industry will get a green light giving access to large tracts of England. But I am pleased that relevant ministers have accepted the need for a do not touch approach when it comes to national parks, areas of outstanding natural beauty and where drinking water is collected.
Sadly, there has been political talk and expert commentary that safety will suffer as a result of the industry’s current ‘crisis’. And that we shouldn't be under any illusions that we don’t need to make some difficult decisions. So where does safety sit in the unholy trinity of safety, cost and production? Firstly, we need to look at what we say and what we do.
As we are well aware, the UK oil and gas industry has been hitting the headlines. Right now the focus is on the impact of the falling oil price, a cause for concern in terms of investment and jobs. Underneath the current headlines, however, are the serious problems our industry has been facing for a number of years including a dramatic decline in exploration, rising operational costs and a substantial drop in production efficiency. While the rapid fall in oil price has exacerbated these existing problems, we believe there is significant potential for maximising economic recovery of oil and gas from the UK continental shelf (UKCS) through collaborative work between the industry, HM Treasury and the new regulator, the Oil and Gas Authority (OGA).
Days after our annual celebration of Scotland’s bard, it was a perfectly-crafted Robert Burns quote which opened Scottish Renewables’ Offshore Wind and Supply Chain Conference (Jan 27).
Data from Oil & Gas UK puts the average cost of operating a field in 2013 close to £30m. This is a significant increase on the £23m reported for 2011, with costs continuing to rise more or less linearly in that time. Concerns over the rate of increase in lifting costs are nothing new; however, the more recent and rather dramatic fall in the price of crude has elevated the level of concern from ‘challenging and worrying’ to something approaching ‘crisis point’. One thing is for sure: Both the absolute level and rate of growth are unsustainable and, if not arrested, will curb investment in the UKCS and forever change the shape of the industry in the UK.
The events of 2014 have demonstrated just how quickly political and economic risks can escalate and shift into large-scale crises, even in historically stable countries. As we move into 2015, the biggest sources of uncertainty for many energy firms will be volatile commodity prices and political risk. That’s reflected in our Political Risk Map, produced with Business Monitor International (BMI), which details overall risk scores for 185 countries based on three categories: political, macroeconomic, and operational risk. Falling oil prices will undoubtedly be the biggest concern for oil and gas companies. In the last five months, we’ve seen the price of Brent Crude drop from more than $100 boe to around $60, a reduction of more than 40%.
Antrim’s discovery of a “proxy tabulation error” sent a shiver down the spine of those of us who attend corporate meetings. Resolutions are easier to calculate than oil reserves, but it’s still no game for amateurs. Antrim Energy’s shareholders thought they had resolved to appoint a chairman in December. By Hogmanay the person they thought they had in place had been invited to “resign” due to what was referred to as a “proxy calculation error”. Instead of receiving the reported nearly 80% of the vote he actually received nearer 21%. Unlike for oil reserves, reporting resolutions is not supposed to be a “probable” against “possible” exercise.
There is no denying that we are in a challenging time for the North Sea oil and gas industry. However, it is how we now meet that challenge that is so important for the long-term future of this industry. For some time we have experienced unsustainable levels of wage inflation and whilst recognition of the need to reduce this is not new the dramatic fall in the price of oil has accelerated the need to address this. Our strategy groups have been in place looking at these issues and longer-term solutions but we are now facing a particular dilemma where operators are looking to reduce costs promptly, especially for those with operations where costs are outstripping revenue.
This will be a challenging year for the North Sea but the necessary austerity may create a new appetite for near-to-market technologies. The average cost of bringing oil to the surface globally is around $7 a barrel, in the North Sea the average is $28, and in some of our fields it is nearly four times that. As a result, the second half of 2014 was brutal to North Sea operators’ profit and loss accounts with 2015 offering no respite. Operators are prioritising cost efficiencies and reappraising capital programmes, while the supply chain is doing its bit as part of the industry belt tightening.
As the oil price plummets to its lowest level in more than a decade, oil and gas industry bosses in the north-east are making cuts to curtail declining profits. We can’t avoid that reality. The energy sector is increasingly feeling the pinch and staff layoffs are inevitable as challenging times ensue over the next quarter and beyond. Redundancies in any company during a recession are tough. But in a cyclical market, it is important to try and make the process as pain-free as possible for those whose jobs could be at threat.
The North Sea oil industry is one of Scotland's great success stories. For decades it has sustained thousands of jobs, generated billions in tax revenue and acted as a platform for exporting the talent and expertise of this great nation around the world. But the industry is at a crossroads.