The Future Is In No Sense Rosy

This is difficult. I really don’t want to appear pessimistic about the future of the UKCS but I’m really struggling to say anything positive that I can put my hand on my heart and say I genuinely believe.

I’ve lived through every downturn since the early 1970s but this time, it’s different and if we don’t accept it's different then the outcome could be really dire. In fact it may be dire anyway.

As a member of the Scottish Government’s Oil & Gas Commission I helped put together a report which I believe was far more comprehensive than Wood’s in that it looked in depth at things like R&D support, the supply chain impact and the whole fiscal setup.  That said, both reports painted a similar and not very pretty picture of the UKCS’s prospects. 

Inevitably then, both reports made somewhat similar recommendations although the Scottish Government report put considerably more emphasis on the importance of maintaining the supply chain and developing a different way of looking at the UKCS based more on the total value of all activities rather than just how much tax revenue the operators paid.

Without doubt, when we completed this report we could still see a way forward but now we might as well tear them both up and start again because the fall in the oil price has changed absolutely everything and much more dramatically than we seem prepared to accept.

To appreciate the difference then consider this: the Scottish Government’s recent oil revenue forecast is for between £2.4billion and £15.8billion over the four years to 2018/19, compared with forecasts of £15.8-38.7billion made in 2014.

That’s a massive and unprecedented fall.

What the industry and government needs to get their heads round is that, whilst some have said recently they think we’re in for a $60-65 oil price for the next couple of years, but it will go up after that are almost certainly being far too optimistic.  

Personally, I think that given current evidence it’s extremely unlikely the oil price will rise significantly anytime soon and there’s actually a very good case for arguing it could fall back.

Why?

Well firstly, I don’t believe the Saudis in particular are going to do anything that might encourage more investment in US shale oil and will regulate their production accordingly.

Secondly, global economic growth remains stuck in a rut and there are genuine concerns over China and the possibility that its growth bubble could burst.

Third, we’re using less oil anyway and there is increasing political pressure over climate change that will lead to even lower use sooner rather than later.

In addition, there are other factors creeping up to bite the UKCS on the rear end.  For example: an impending deal with the Iranians over their nuclear programme and the subsequent lifting of sanctions.

It is already known that Shell and BP have been discussing re-entering the Iranian oil business if the sanctions are lifted because it offers a more affordable and therefore more profitable opportunity than the UKCS.

Oh and there’s Greece which if by the time this piece is published still hasn’t sorted its problems could have a major effect on EU confidence.

Also - what happens if the USA decides to go ahead with exporting shale oil?  If supply goes up then the price most certainly won’t and that’s more bad news for the UKCS. 

The long and short of it is that the North Sea is facing an increasingly unclear future which isn’t actually helped by the lack of a coherent UK energy policy or as yet, any real indication as to what chancellor Osborne intends to do about exploration or other incentives.  

Actually, those incentives to explore even if on a par with Norway may not now be enough. I’m now of the opinion that even reducing taxation to standard corporation levels may actually not be enough.

Without wishing to appear overly dramatic it could well be that what we’re seeing is actually the beginning of the end game for the UKCS arriving far sooner than any of us anticipated.

There are some field development programmes in progress where capital has been committed and these will provide jobs for some time to come. Similarly, a few contractors are picking up some lucrative overseas jobs which will also provide jobs for a reasonable period of time and agencies such as Scottish Enterprise should help them seek out more of those. 

However, the likelihood of achieving that ultimate goal of 23billion barrels is looking somewhat “iffy”.

I think we really need to be honest with ourselves as an industry.  To achieve the real production potential of the UKCS we need – as Professor Alex Kemp said last year - investment, technological innovation, effective regulation and tax incentives.

Of those, at the current oil prices I can only see tax incentives as being the most likely to be implemented. But how far they’ll go and whether they’ll have any real impact is anyone’s guess. Effective regulation can of course only be implemented if the tax incentives catalyse some degree of recovery in investment.

Of course, the real tragedy of all this is the huge loss of potential caused by the rising loss of mainly highly skilled jobs because I just wonder what on earth all those people will do now. 

Some will be lucky and find new positions but in an industry where the problems are global and the job losses are absolutely not just restricted to Aberdeen or the UK then this is not going to be easy.

Can people shift to other industries? 

Well not in Aberdeen they can’t because, as Energy has warned many times before, there has been nothing like enough diversification to create the number of highly skilled jobs needed. Oh and believe me, pedestrianising Union Street isn’t going to make a difference.

Irrespective of how the next year or so develops what we need to do now is set up a “what does Aberdeen do next?” initiative, but with some fresh thinkers; not the ‘usual suspects’.

I’d suggest ACSEF should run it but they’re about as useful as a chocolate fireguard so maybe Aberdeen and Aberdeenshire Councils should do something between them perhaps in league with the Chamber of Commerce. 

We need a viable strategy to start making that transition away from oil & gas and onto whatever we can do next and the sooner the better.

Because, if my instincts are right then we don’t have a lot of time left to think about it.

Sadly of course, due to Westminster’s latest piece of ideological tomfoolery that strategy probably needn’t include manufacturing wind turbines, or towers, or components of any kind!

(First published in the Press & Journal Energy supplement July 2015) 

© Dick Winchester July2015