Oil price turmoil is a tale of two halves for the North East

A major oil industry survey offers clear instruction for the Government ahead of next month's Budget

Petrol pump
Petrol pump

THE plunging price of petrol is good news for motorists but bad news for some in the oil industry. Tom Keighley looks at how the Government faces a difficult balancing act with one of the country’s most precious assets

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IT would be fair to bet that millions of motorists filling up their cars in recent weeks will not have lost too much sleep over the internal politics of Opec and the tumbling price of oil.

The stand-off between the US and the major oil producing nations has had one immediate effect: cheaper petrol. That in turn has boosted many businesses which either use oil as a raw material or which have significant transport costs.

But the North East - which, after Aberdeen, is one of the most significant areas in the North Sea oil exploration industry - has also seen the downside of the oil price slump, with job losses and closures at a number of firms in the sector.

The redundancies at Archer, DeepOcean and MHWirth mean hundreds of people in the North East looking for work, and have increased pressure on the Chancellor George Osborne to reduce the tax burden on oil companies in next month’s Budget.

But a new report due to be discussed in Newcastle later this week suggests that the recent price shock in the oil industry is not the root cause of the problem - and also suggests that there are solutions to hand.

Stock market
Stock market

A barrel of crude oil is currently hovering at around $48. That’s more than 50% shaved off prices which had reached $110 per barrel in 2014.

But according to Malcolm Webb, chief executive of the industry body Oil and Gas UK, even when the price of oil was high, the industry was “hamstrung” by costs, “unsustainably heavy” tax burdens and inappropriate regulation.

He said: “At current oil prices, we now see the consequences only too clearly. The industry recognises that its cost base is unsustainable. Cost and efficiency improvements of up to 40% are required to give this basin a viable future. This adjustment is now under way but cost control alone is not the answer.”

Instead, he suggests the North Sea basin needs sustained investment, and says the not inconsiderable amount of £94bn will be needed to get at known reserves.

With the industry supporting thousands of jobs in England and Scotland and proving a multi-million income to the Treasury every year, getting it right is a high-stakes business.

Getting it right is crucial to the North East supply chain. Subsea technology providers, umbilical manufacturers, training providers and oil field services firms in the region all need to see further exploratory activity — which last year collapsed to its lowest level since the 1960s. The number of exploratory wells is expected to decline further this year, but the North Sea basin needs to generate new projects.

The equivalent of 10bn barrels of crude are said to be recoverable from the UK Continental Shelf, and 6.3bn’s worth of projects have already been sanctioned, but without investment it’s likely to remain untapped.

Petrol Station prices drop at Supermarkets
Petrol Station prices drop at Supermarkets

Mr Webb also worries about the impact that lack of investment will have on North Sea hubs, such as the North East’s cluster.

He said: “Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground.”

To boost attractiveness to investors, the Oil and Gas UK is asking for prompt reform of the tax regime to include a reduction in the headline rate of tax and ushering in of investment allowances.

In December, the Chancellor delivered a reduction in the rate of supplementary charge on corporation tax from 32% to 30%. The industry has responded “positively” but the report calls for more action. Mr Osborne has hinted strongly at further tax reform on a grander scale than the 2% announced in the Autumn Statement.

Mr Webb is clear that oil companies have done their part and says that the UK Government must now step up to bolster the industry.

“This offshore oil and gas industry is a major national asset” he said. “Our indigenous resources hold the promise of a successful industry for decades to come and we have the skills needed to realise that potential. The industry is taking measures to improve its cost efficiency and we are pleased that even before the steep fall in oil price, the Government took the important steps of implementing the Wood Review recommendations and conducting a comprehensive tax review.

“The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline.”

Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit
Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit

George Rafferty, chief executive of North East offshore sector body NOF Energy, said Oil and Gas UK’s Activity Survey 2015 demonstrates the industry’s understanding of the challenges ahead, and the need for collaborative thinking.

He said: “The creation of a stable industry will have multiple beneficiaries from UK plc through to members of the supply chain whose innovative technology-led solutions will be essential to helping the sector control costs and maximise the resources in the North Sea.

“Companies reacted superbly to requirements placed on the supply chain as a result of the record levels of investment made in the UKCS in the last few years. They are now acting with similar agility to meet the challenges of the industry’s current environment and the sector is responding positively to the supply chain’s collaborative and supportive approach.”

On a positive note this year’s survey shows production in 2014 was at its highest rate since 2000. It is this glut in supply that continues to wobble prices — a dynamic that has been likened to a “shot in the arm” for UK consumers who will see lower energy, food and fuel costs.

Lower commodity and energy prices have helped to offset the effects of weak global demand on UK exports. The extent of these knock-on benefits will hinge on how low prices can go. Industry analysts are divided on this. Prices started climbing again after Christmas but have since fallen as the balance between supply and demand has remained flat.

Peter Spencer, chief economic advisor to the EY ITEM Club said the oil price collapse would be a net boost to the economy as it could begin to trickle through to real earnings.

He explained: “Not every economy will be a winner from oil prices collapsing, but the UK certainly is. We have described the previous weakness of commodity prices as a silver lining in the storm clouds gathering over the world economy.

“But with oil prices now down over 50% since last June, this silver lining has turned to gold. While it is not a game changer in terms of growth prospects, falling oil prices come just as the recovery was losing momentum and will move the game up to a higher level for a year or two.

“The UK consumer has been lashed by rising fuel and food prices for so long, but is now the major beneficiary as these pull back. So far, the recovery in our incomes has been driven by larger numbers entering work while earnings have been falling. But, now individuals can look forward to a substantial increase in real earnings.”

Much of the North East’s industry sees lower prices as a boon. Liz Mayes, the North East regional director of EEF the manufacturers’ association, said her industry was conscious of the turmoil in the oil industry, but could not ignore the knock-on benefits of falling energy prices.

She said: “The most obvious winners will be in sectors such as plastics and rubber where oil provides the primary raw material, but likewise many companies will be feeling the benefit of reduced transport costs.”

With so many winners, as well as those high profile losers, it will make the Chancellor’s balancing act tricky territory next month.

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