UK government must save North Sea oil and gas sector

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BP rescue and search helicopter stationed in North Sea (photo Bryan Burke 2008)

BP rescue and search helicopter stationed in North Sea (photo Bryan Burke 2008)

The UK government is abandoning the North Sea oil and gas sector to its fate, despite the fact that there is still enough oil and gas in place in the region to generate the same amount of revenue that has been reaped up to now, argue Alex Russell and Peter Strachan of Robert Gordon University. They advocate that full control of energy and oil within the Scottish section should go to the Scottish government, so that at least this part can be saved.

The (oil) well-funded Oil and Gas Authority (OGA) was established on 1 April 2015 as a consequence of the publication on 24 February 2014 of Sir Ian Wood’s  Review  on maximising economic recovery from the remnants of the UK’s North Sea oil fields. The OGA is an executive agency of the Department of Energy and Climate Change (DECC) and states on its website that “we work with government and industry to make sure that the UK gets the maximum economic benefit from its oil and gas reserves”.

Over most of the past forty-five years OPEC has been pilloried by the West for taking actions that increased oil prices. They really can’t win

With respect to offshore oil production the OGA can point to an unexpected increase over the past year in barrels of oil equivalent output. Alas, at the same time there has been around as many as 80,000 North Sea oil-related job losses over the past 15 months. From a UK perspective does this outcome represent a maximisation of economic benefit? It may be akin to maximisation of production but in economic terms it resembles a car crash.

Strange bedfellows

Those oil companies which have slashed their workforce and increased production will indeed be getting some return on their huge recent past investments.  However, it appears that due to the low oil price accounting losses are being incurred and rather than contributing cash to the UK Exchequer oil companies are having past tax payments repaid to them by Chancellor George Osborne.

The reason for this situation is that US-inspired political machinations involving Saudi Arabia have driven down the price of a barrel of Brent crude to a mere $30 and have brought  the UK oil sector to the brink of oblivion.   OPEC, the cartel of oil producers led by the oil rich Kingdom of Saudi Arabia has been labelled the villain of the piece for its failure to increase oil prices by reducing oil output in the face of a global glut of oil stocks.

Has world history seen stranger bedfellows? Would the US have any interest in having a relationship with the Saudis if that Kingdom had no oil?

Well, there may be a smidgeon of truth in these claims, but over most of the past forty-five years OPEC has been pilloried by the West for taking actions that increased oil prices. They really can’t win. And in any event it is all a red herring. If there is a genuine cartel that can control the price of oil it consists not of OPEC but of the US and Saudi Arabia alliance. US production and stockpiling of oil has never been higher. By all accounts Saudi Arabia is on the point of selling shares in its national oil company Saudi Aramco and that can only be to strengthen even further its political and economic ties with the US.

Has world history seen stranger bedfellows? Would the US have any interest in having a relationship with the Saudis if that Kingdom had no oil? No answers required please, as this really is the world’s dumbest rhetorical question. Self-interest is at the heart of the relationship and when a definitive history of the fallout from it is written it will not be on the list of Barack Obama’s favourite bedtime reads.

Strident demands

Arguably, the US/Saudi Arabia cartel has forced down the oil price to put economic pressure on their common adversary Russia. Clearly there are other external factors that have impacted on oil price such as the downturn in the economies of China and Europe but primarily US and Saudi over-production relative to demand is the root cause of the oil crisis.

It is perhaps an example of economic and political genius on the part of the US. When oil prices were high they milked rewards from their fast depleting fracking plays and now that oil is scraping the bottom of the price barrel they have persuaded other countries to sell their oil at give-away prices. The US economy is booming as a consequence.

The UK Government led by Chancellor George Osborne has shown all the sparkling reaction to the crisis that you would expect to see from a rabbit paralysed by myxomatosis and caught in the glaring headlights of a ten ton truck

Unfortunately the high cost North Sea oil industry has been a casualty of this situation. The OGA’s strident demands for North Sea Operators to be more efficient in their operations and to share what in the past would be commercially sensitive information with them, has resulted in a cataclysmic loss of possibly 80,000 North Sea-related jobs.

It is hard to believe that substantial real efficiencies have been brought about by forcing oil companies to share information and resources as claimed by the OGA. The reality is that rates of pay for contractors have been slashed and investment in exploring for new reserves has stopped.  The resultant job losses are a disaster especially for the North East of Scotland and for the future of the industry.

Huge profits

A way should be found to persuade oil companies to focus on finding new reserves of oil and gas that can be exploited when oil prices rise rather than to produce oil currently at a loss. The UK government and the oil companies need to invest in the future and repay back the huge profits they have taken out of the North Sea. It is good news if real efficiencies have and can continue to be made across the industry and everyone would support the OGA in their efforts to achieve this outcome. But even then there would need to be questions asked why over the past forty years these inefficiencies were tolerated. Exactly how much revenue to the UK has been lost through the prevalence of inefficient operational practices by oil companies? Will anyone be held accountable?

The UK Government led by Chancellor George Osborne has shown all the sparkling reaction to the crisis that you would expect to see from a rabbit paralysed by myxomatosis and caught in the glaring headlights of a ten ton truck bearing down on it. The only response recently has been to advocate the commencement of fracking operations mostly under national parks in England’s green and pleasant land; but for how much longer once fracking starts?

By all means extract oil where it is possible to do so at a profit but wait till the price of oil rises before maximising production

The OGA are taking a leading role in this and on 17 December 2015 they announced that 159 onshore blocks under the 14th Onshore Oil and Gas Licensing Round were being formally offered to successful applicants.  This defies economic logic as onshore production will increase the supply of oil and gas thereby help drive down oil prices to the further detriment of the North Sea and, in addition, will minimise economic recovery from shale as oil and gas prices are at rock bottom levels. Perhaps Osborne should revisit and take heed of the economic disaster that resulted from Gordon Brown selling the UK’s reserves of gold just before gold prices began a meteoric rise.

The UK Government and the oil industry have reaped enormous direct tax income (£300bn) and profits respectively from the exploitation of North Sea oil. There is enough oil and gas still in place in the Atlantic and the North Sea that can generate at least the same amount of income once oil prices rise.  It is not a case of ‘if’ oil prices will rise but ‘when’ they rise. The economic fate of Scotland should not be imperilled by the mistaken and short-term decision-making of the oil majors to merely get some payback from their proved reserves rather than take the longer game stance of investing in retaining staff to continue to explore for new reserves.

Stoking the engine

By all means extract oil where it is possible to do so at a profit but wait till the price of oil rises before maximising production.  Neither should it be imperiled by a UK government that should be incentivising the industry by matching investment funds £ for £ and by agreeing to impose exactly the same taxation regime on the industry as on any other industry.  In this way economic return can be maximised and the political gains for Westminster would be that these actions would help counter claims that they are solely focused on stoking the economic engine of the already over-heated London area rather than redistributing the nation’s wealth over all the UK.

Full control of energy and oil within the Scottish section of the North Sea should be transferred to the Scottish government

In the absence of Westminster showing a willingness to help maximise economic recovery from the North Sea full control of energy and oil within the Scottish section of the North Sea should be transferred to the Scottish government and tax receipts for economic activity taking place within Scotland should be part of the funding arrangements for Scotland. Under those circumstances we would have more confidence that the actions suggested above will be taken to ensure that the current plight of the industry will not result in full-scale decommissioning of all North Sea oil facilities.

Editor’s Note

Alex Russell is Professor of Petroleum Accounting, Robert Gordon University. Peter Strachan (@ProfStrachan) is Professor of Energy Policy, Robert Gordon University.

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