Analysis

North Sea: Chancellor's £5m lifeline comes at a critical time

Philip Hammond has toured Aberdeen and Dundee this week, to announce £5m of support for North Sea oil and gas exploration, for an industry that appears to have bottomed-out at an estimated annual worth of £17bn to the UK economy

Recent reports from the industry body Oil&Gas UK and others this year suggest confidence is starting to return to the UK's oil and gas industry after three years of sharp decline since oil prices nose-dived from a peak of around £110 a barrel, to the level of £40-50 a barrel, where, small fluctuations aside, prices have stayed. But Brexit looms and this is an industry concerned about the potential prospect of WTO trade rules being imposed in two years' time. Investment has halved and is still falling, according to Oil&Gas UK, which estimates around 130,000 jobs have been lost in total across the oil and gas supply chain since 2014/15 – 30,000 from the sector's heartland of North East Scotland.

It's a critical time for an industry now looking at decommissioning for its best new opportunities for coming years. About 20 million barrels have been secured for recovery, but estimates of the potential for more if extraction technology is pushed further, stretch to 400 million barrels.

Government's announcement this week, of £5m for further exploration in the UK Continental Shelf (UKCS) and favourable tax conditions for local business, is designed to show UK oil and gas is still vital to the UK's economy. The industry's annual worth is put at £17bn now (down from about £40bn three years ago) and it still supports some 400,000 jobs, but it could bring in receipts of hundreds of billions by 2035, Oil&Gas UK says, if the right joined-up policy approach comes from industry and government. Oil and gas is expected to be still providing two thirds of the UK's energy mix by 2035, even with planned advances in renewables' share.

"The oil and gas industry remains vital for the Scottish economy and the UK as a whole," Hammond said. "The £5 million funding I am announcing will help exploration to find potential new deposits, and boost prospects for jobs in Aberdeen and the surrounding area. This continues the UK government’s extensive package of tax and funding support for the industry and the wider Scottish economy."

According to analysts, part of the problem for the industry of UKCS has been its lack of cost competitiveness, against parts of the world where more and more oil can be pumped out of deserts, relatively easy to access with low overheads. This is compounded by the US finding more and more oil and gas, from fracking as well as conventional oil wells. As oil prices have stayed deflated and look like remaining so, the UKCS has had to become a lot more efficient to compete – painfully so for businesses unable to move or change quickly enough. 

Oil&Gas UK is predicting production will continue to decline post-2020 without significant new capital, but it also says the required reduction in unit cost is being made more than anywhere else in the world, making the UKCS ripe for investment again – in the top quartile globally. Aberdeen and the wider area also have the benefit of 40 plus years of industry experience and knowledge; a hotbed of oil and gas expertise.

The UK Energy Minister, Richard Harrington, said: "North Sea oil will continue to fuel growth and jobs across Scotland and the rest of the UK, with an estimated 10-20 billion barrels still remaining.

"I was in Aberdeen last month and saw first-hand the work of the Oil and Gas Authority which we established to be a strong, independent regulator focused on maximising economic recovery. The sector continues to have the full support of the UK government, confidence is returning, and today’s announcement recognises there are great opportunities for further exploration."

Pinsent Masons' oil and gas industry expert, Bob Ruddiman, writing in the company's Out-Law.com, says: "Pinsent Masons has been at the centre of a large number of oil and gas deals this year, and the increasing number of these transactions underlines Aberdeen's place as an oil capital where there is still a great deal to play for.

"Paradoxically, the industry now needs to attract young talent who must be recruited and inspired over the next few decades – especially in a new era where 'big data' and digitalisation will play a central role in exploration and production."

 

 

If you would like to contact Jon Masters about this, or any other story, please email jmasters@infrastructure-intelligence.com.