Is it all over for the North Sea oil industry? We have had a forty-year boom in oil production, something few people thought possible at the beginning when normal production curves suggested crude extraction would tail off to nothing by the millennium.
Advances in technology and high prices have extended the life of the industry, but there are signs that we might be nearing the end. They include the dozen rigs laid up in the Cromarty Firth, or the others towed away to be scrapped, the many thousands of job losses and the slowdown in the Aberdeen property market.
With crude prices at 12 year lows, analysts Wood Mackenzie suggest that 140 offshore fields could be shut down over the next five years – as many as 50 this year alone – even if the price more than doubles from its present $30 a barrel to $85. That contrasts with only 38 new fields expected to be brought into production.
The futures market does see a recovery in price, but not to anything like $85. Prices for Brent crude (an industry benchmark) in March 2023 are still below $53. Most North Sea fields are uneconomic at this price, and cannot compete with low cost onshore production in the Middle East, or fracking in the US.
The present price war between Saudi Arabia and the US shale industry will not last for ever, but there are other factors which will act to keep prices lower in the next decade than they were in the last. Demand is supressed by slower growth in Asia – particularly in China – and new sources of supply are coming into the market. Now that sanctions have been lifted from Iran it is free to export oil and there is the possibility that fracking will start onshore in England and other European countries.
Many oil majors have already moved out from the North Sea, selling their interests to smaller producers with lower costs. Now some of those companies are weighing up the choices of meeting the costs of decommissioning – capping wells, removing platforms and pipelines – with continuing to produce oil at a loss.
Most seriously for the future is that exploration work has virtually stopped as companies cut their costs as low as possible. There are huge known oil reserves under the North Sea and the Atlantic to the west of Scotland, but exploiting them will be prohibitively expensive unless the oil price recovers to its previous high levels.
The impact of this on Scotland has yet to be seriously examined, either by the Scottish Government or anyone else. There has been very little planning for a ‘post-oil’ economy. The most immediate effect will be on output and employment. Lay-offs of highly paid offshore workers can be expected to continue. Scottish GDP growth is about half that of the UK and unemployment has been rising for several months.
Those oil services companies which took the opportunities offered by the growth of the oil industry to internationalise – the Wood Group being the leading example – will be able to mitigate the effects by following their customers to lower-cost overseas areas which are still producing. But many smaller companies, particularly in the North-east, will face hardship. Scottish Enterprise estimates that there are 2,000 companies in the supply chain and that at the peak 225,000 jobs depended directly or indirectly on the industry.
A taskforce was set up by a year ago, but it has a difficult task in the face of a continuing decline. It is not only Scotland which is suffering. Statoil, the Norwegian state oil company, has laid off tens of thousands of workers, unemployment in Norway is rising and the government has had to slash interest rates to try to stimulate the rest of the economy.
Decommissioning will provide work, but it is a long term prospect and not all the business will come to Scotland. The first of four giant platforms on Shell’s Brent field is going to Teesside to be dismantled.
Oil is not the whole of the economy – indeed it is not and Scotland has the advantage of a more diversified economy than Norway. But we need to start planning now for when the oil finally runs out.
This blog first appeared on the David Hume Institute site and is reproduced with permission
barney crockett says
The simple fact if there is to be a post-oil Scotland it will be a pretty poor place which is not much understood in wider Scotland. But the oil need not be in the North Sea. Aberdeen is the second biggest concentration of oil workers in the world, I believe but many already work overseas. The hope must surely be that that develops further.