North sea oil - Scotland's drop in the ocean

Written by Tom Freeman on 12 December 2016 in Feature

Has North Sea oil and gas turned from boom to burden?

The 1973 oil crisis led to the quadrupling of the price of oil. Suddenly Scotland was potentially a very wealthy country.

While the SNP may bear little political resemblance to the party which came up with the phrase ‘It’s Scotland’s oil’ forty years ago, the idea of oil and gas as a driver for Scotland as an independent country remains as potent as ever.

And yet, the oil industry is becoming increasingly portrayed as a burden rather than a blessing.


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With the price of oil having crashed by nearly 100 per cent in the last 18 months, financial cases made during the 2014 referendum on independence are looking increasingly flimsy.

While former first minister Alex Salmond claimed oil could make every Scot £40,000 better off in an independent Scotland, David Cameron suggested Scotland couldn’t realise the potential of the oil industry unless it stayed in the UK.

Both cases looked increasingly absurd, however, as the price of oil plummeted after the referendum.

United States production almost doubled as Iraq and Russia also increased their activity, while production fell in Iran, Venezuela, Nigeria and elsewhere.

Although BP now says the earth is not running out of oil, it is widely understood that Scotland’s biggest fields are in decline, while the rate of drilling new exploratory wells remains at an all-time low. 

Despite this, North Sea oil and gas output has risen in the last two years after a period of decline, mainly driven by investments made during the days of higher oil prices.  

But as far as the narrative goes, in recent months the focus has turned from production to decommissioning, as offshore fields approach the end of their lifespan. The majority of expenditure and skills in decommissioning is in plugging and abandoning oil wells. 

Ahead of UK Chancellor Philip Hammond’s Autumn Statement, Scottish Energy Minister Paul Wheelhouse described the business of decommissioning and disposing of oil rigs as an opportunity for Scotland. Provided, that is, Hammond offered the necessary tax breaks.

And those waiting for more details in the statement were left disappointed when Hammond merely said: “We will deliver the commitments we have made to the oil and gas sector.”

No new help for North Sea oil and gas, then, but a reaffirmation of existing commitments. The SNP were critical. Aberdeenshire MSP Gillian Martin called it a “betrayal”.

“They should not get away with using the North Sea as a cash cow without returning the favour stimulating exploration and providing the necessary investment, loan guarantees and tax incentives,” she said.

However, Hammond’s statement did not receive such a hostile reception from industry body Oil and Gas UK. Chief executive Deirdre Michie welcomed the commitment to keep to the Treasury’s 2014 ‘Driving Investment’ plan, which recognised the changing market and sought to reform the fiscal regime appropriately. In other words, reduce the tax burden and encourage further seismic surveys to look for more oil.

“We are pleased to hear the Chancellor recommit to HM Treasury’s Driving Investment plan,” said Michie. “This sends a strong signal to investors that the government recognises that the UK oil and gas tax regime needs to be predictable and internationally competitive.”

But plans to capitalise come amid warnings Scottish ports are already losing out to European and Scandinavian competitors who are taking the lead in being ready to handle the massive rigs which will be decommissioned over the next three decades.

Negotiations over how decommissioning can be supported are ongoing, with a Scottish Government action plan expected imminently. Michie said: “We will continue to work with the Treasury on the important issue of decommissioning tax relief, key to stimulating investment and activity for the supply chain, which we hope to see resolved by the 2017 Budget.

“The sector is still in urgent need of fresh investment and we need government to keep working with us to ensure a competitive business environment.”

A high-profile example is the Aberdeen City Deal, which has been hailed as a “bridge to the future” for the economy in north east Scotland. The deal will fund a new Oil & Gas Technology Centre to support learning and innovation. 

Meanwhile, Dundee is also looking to benefit from the decommissioning market. A £10m disposal and waste management facility is under construction at the Port of Dundee and is expected to be in operation early next year.

Forth Ports has teamed up with Augean North Sea Services (ANSS) to open an ultra-heavy lift quayside and a 25,000 square feet material transfer facility.

Decommissioning may not be the only game in town, however. The Office of Budget Responsibility (OBR) predictions, published as Hammond spoke, revealed a small glimmer of recovery for offshore operators.

A faster than expected rise in oil prices in dollars this year led the independent forecaster to predict a further rise in the price of both oil and gas of 10-15 per cent.

The price of a barrel of oil is now expected to make a slow recovery, eventually hitting $60 by 2022, the OBR said.

“Today’s Treasury forecasts show our industry will be contributing £10 billion more in production taxes over the next five years than was previously expected,” said Michie in response to the figures. 

“While this can be attributed in part to changes in commodity prices and exchange rates, it also reflects the significant work of industry to make our operations more efficient and to increase production.

“Our industry can make a vital contribution in delivering the Chancellor’s ambitions for the economy and the government’s industrial strategy. We are developers of cutting-edge technology, providing highly skilled jobs, helping power to the nation and exporting to the world.”

Tax revenues may recover, but it comes from a low base. Oil and gas revenue is £500m in the red in 2016-17. The taxpayer is effectively paying companies to extract oil for profit in an attempt to attract inward investment.

And the predictions come from the OBR, a body which predicted an oil price of $100 a barrel in March 2014.

But it is not alone. Business advisers PwC also now predict a price rise to a more ‘robust’ figure of $60 to $70 a barrel.

“This recovery will be uneven. Moreover, we are unlikely to witness a return to the boom period as prices recover,” it said.

“Those players that can operate efficiently and profitably in the current environment, while investing in core business areas for future growth, will be the fittest to emerge from the turmoil and most likely to reach for the stars.”

But while the ‘fittest’ multinational oil producers reach for the stars, what about the rest of us? 

This summer saw the first strikes in the North Sea for a generation as Unite and RMT members working for Wood Group on eight Shell platforms downed tools over plans to introduce lower pay, longer hours and more demanding work schedules.

And in wider society, the more subsidy and tax breaks offered to the industry, the smaller the boost in revenues enjoyed by the public purse.

As Scotland gets more fiscal powers, Auditor General Caroline Gardner warns there will be “more complexity, more uncertainty and more volatility” in Scottish public finances. Will volatility in the oil price have a role in that? 

The agreed fiscal framework underpinning new devolved powers is linked to GDP raised in Scotland, and under the new rules, the Scottish Government will only be able to borrow for resource purposes during a budget should a Scotland-specific ‘fiscal shock’ happen. 

But whether or not another crisis in the oil industry represents such a shock would depend on the UK and Scottish governments reaching an agreement. This seems unlikely in the current climate.

Even if Scotland’s oil doesn’t provide a shock to Scotland’s economy, could it happen the other way round? 

The biggest risk to the industry would be a second independence referendum, suggested BMI Research, a subsidiary of global credit rating firm Fitch, in a recent report.

“A second vote on Scotland’s sovereignty is the main downside risk to our North Sea production forecast, the chances of which will substantially increase if a ‘hard Brexit’ is realised,” it said.

“The ensuing build-up to the election will cast a great shadow of uncertainty over the regulatory framework governing the petroleum sector going forward, especially given the fact that the previous referendum was closer than expected.

“Companies operating in the North Sea could potentially hold off making investments in that time period, waiting instead until Scotland’s fate has been determined.” 

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