Fear is mounting in Britain’s oil industry. So much so that Aberdeen City Council has announced an emergency summit to tackle the challenges facing the North Sea oil industry.
The crude oil price has fallen by almost 50% since June, sending ripples through oil dependent economies from America to Russia, from the Middle East to Britain’s own North Sea industry: it looks as though few nations are set to emerge unscathed.
The leading oil research company, Wood Mackenzie, said that, at current prices, only three of the top 40 international oil companies generate sufficient free cash flow to cover spending, including distributions to shareholders.
The North Sea oil industry is described as being close to collapse. Aberdeen City Council leader Jenny Laing stressed the urgency of the matter. She said the UK and Scottish governments, trade unions and industry bodies needed “to get round the table as soon as possible”.
The Labour councillor said a “strategic plan” was required to save jobs. Around 375,000 people work in the UK oil industry and half of those are in north east Scotland.
BP — one of the biggest oil companies in the world — has announced plans to cut hundreds of jobs in the UK over the next year.
Meanwhile, a Scottish government spokesman said it was continuing to do all that it can to support Scotland’s oil and gas sector.
“As we have long said, what the industry requires is a stable predictable fiscal regime, and that substantial tax incentives are needed to achieve the objective of maximising recovery.
“Unless the UK government acts to bring in further measures, the likelihood is some fields will cease production early.”
The price crisis has been triggered by various factors.
One is OPEC — a cartel which controls nearly 40% of the world market. Its leading member Saudi Arabia and their Gulf allies are determined to protect their market share almost at any cost — even if the price falls to $20 a barrel, as Saudi Arabia’s oil minister, Ali al-Naimi has said.
Meanwhile, some of the North Sea’s problems follow developments in America — a country which has become the world’s largest oil producer.
America does not export crude oil, but, in what’s known as its “shale gas boom”, entrepreneurs have been extracting abundant oil and gas from underground rocks, by blasting them with a mixture of water, chemicals and sand-“fracking”, in the jargon.
The abundance of shale gas means America now imports much less, creating a lot of spare supply, which sends prices down. Indeed, the Saudis have pointed to this as a factor behind the latest crisis.
However, many executives — including those at Lukoil, a big private Russian firm — think the shale gas boom won’t last.
The tumbling oil price has exposed the fragility of the industry. Shale gas companies are now facing financial ruin. They borrowed huge amounts of money from investors, for shale prospecting and extraction, and now both activities have become unprofitable.
Most loans were provided by midsized US banks located in the shale oil heartlands. They rushed to capitalise on the fracking bonanza, and are now seeing their shares tumble alongside the oil price. Could this trigger off another ‘subprime’ meltdown of the banking system?
Meanwhile, the most pressing issue for Britain is the fate of the North Sea basin, where costs are rising as oil and gas fields are depleting and exploration becomes more difficult.
‘It’s almost impossible to make money at these prices — it’s a huge crisis,’ the chairman of the independent oil explorers’ association said last week.
The industry has weathered shocks before. Oil-price slumps usually lead to cuts in energy firms’ investments. That means production eventually falls, helping prices to stabilise.
But that could be years down the line. And even when — and if — it rises, warns Saudi Arabia’s oil minister Ali al-Naimi, the world might not see the oil price back at $100 a barrel again.
Is it the end of the road for the North Sea oil industry?