Friday, December 12, 2014

No Longer the North Sea bonanza


North Sea oil was central to the dream of Scottish independence in this year’s referendum. The wealth stored under the waves would buttress public spending, said the SNP, and it would also enable Scots to set up their sovereign fund as Norway has to hold some of its fruits for future generations.

The SNP predicted that oil would be selling now for $110 a barrel. Unusually, however, it forecasted that the price would stay constant over the next five years. Yesterday, North Sea Brent crude traded at one point at $64.24 (and could drop further). The world is now facing an era of cheap oil so the SNP is joining a long queue of people who got their predictions about oil wrong.

 Between 1991 and 2008, tax receipts from the North Sea grew strongly, reaching £12.4 billion, on the back of prices reaching an all-time high in 2008. From 2009, however, revenues have fallen, from £6.1 billion in 2012-13 to £4.7 billion in the last financial year and to £2.8 billion in the one ending next April. The drop equals roughly half of what Scotland spends each year on education.

The price drop may not be temporary. Global demand is “very subdued” and “buoyant” supplies are available from the US where shale is becoming increasingly significant. Some producers may increase, not cut, production.  Banks are rationing lending for energy giants. Projects must show that they can survive at less than $75 a barrel. North Sea investments are competing for cash that has other places to go. The North Sea fields are ageing. New discoveries are being made, but they are smaller than before. Existing fields are also becoming more expensive to run, and more prone to breakdowns. In the North Sea last year only 15 wells were drilled as production costs soared more than 15 per cent. The sharp rise in costs has led oil and gas companies to focus their investments in Norway and North America rather than the North Sea.

The Office of Budget Responsibility believed that oil and gas tax receipts would fall by £100 million between 2014-15 and 2019. Production would stay flat. However, the figures from the independent budget watchdog are already significantly out of date for now, since it was based on a $100-a-barrel price this year. North Sea crude, they estimated, would fetch $85-a-barrel for the rest of the decade.

Falling production and exploration will see employment numbers in the North Sea drop by around a tenth, a report has found. North Sea oil and gas could lose up to 35,000 jobs in the next five years, industry experts have warned. Although some of the job losses will come with the retirement of older workers, the report reveals that more than half of the workforce is under the age of 45. For every offshore job that is lost, three more industry jobs are lost onshore, according to union officials. North Sea oil represented 30% of Scotland's GDP (last year on $113 oil)

Jake Molloy, regional organiser of the RMT union in Aberdeen, said: “The offshore industry is facing what amounts to a perfect storm of a falling oil prices on global markets, the shale revolution, rising costs to extract oil and gas from the North Sea, and smaller and harder-to-access fields.”


An independent Scotland with a budget surplus and an oil investment boom? A fairy tale. 

2 comments:

ajohnstone said...

http://www.bbc.com/news/business-30445420

Brent crude fell to below $63 a barrel, its lowest price since July 2009. The price of Brent fell by $1.83 to $61.85 a barrel,
The root cause of the fall in prices was "a surge in non‐Opec supply to its highest growth ever and contraction in demand growth to five‐year lows". It predicted that non-Opec supply gains would add to a global glut of oil.

ajohnstone said...

The low oil and gas prices are hurting Scotland now because the North Sea is a key part of its economy and they will hit it in the future because, at these prices, it won’t be commercially viable to extract many of the remaining reserves as what is left is difficult to access, making it expensive to extract.

Former SNP leader Alex Salmond famously promised to make Scotland the “Saudi Arabia of renewables” and much of its economic future is based on developing a world-leading green power industry.

http://www.independent.co.uk/environment/new-era-of-cheap-oil-will-destroy-green-revolution-9922217.html

“An independent Scotland would suffer quite badly if the low oil price was sustained. There would be lower growth, lower tax revenues and a much worse structural deficit. It would bring the economics of independence into question,” said Professor Brian Ashcroft, of the University of Strathclyde business school. Scotland also hosts many of the renewable energy facilities threatened by the collapse in oil prices.