Throughout my career I’ve been involved to some extent or other in the development and commercialisation of technology. So, when faced with a selection of technology ideas to back I am acutely aware of the difficulties involved in sorting the wheat from the chaff. Believe me. It isn’t easy because the parameters you need to consider are many and varied and, of course, instinct and experience also count for a lot.
Oil prices have crashed and the North Sea is hurting badly, with the likelihood that this is going to be a prolonged downturn . . . at least for the bulk of this new year, if not longer. Capital investment in the North Sea could halve by 2017 unless there is urgent reform of the tax regime in light of a big drop in the price of crude oil, according to Oil & Gas UK, which is hoping for good things from the Treasury before the May election following promises made early last month. And Wood Mackenzie has estimated that 32 potential European oil field developments worth more than $85billion (£55billion) are waiting for approval and could be at risk if oil prices continue to slump. A high proportion of those projects have a break-even price higher than $60 per barrel and many are in the UK sector.
A generous spirit and calm disposition are desirable qualities at this time of year. From giving and receiving gifts, making long drives for annual visits or even putting up with certain relatives, commitment and patience are needed. The North Sea oil and gas industry needs a similar outlook in 2015. There are going to be challenging times, but with less self-interest and more collaboration there are certain to be good times too.
Predicting “uncertain times” for 2015 is no prediction at all. In this industry change is the only constant. It always has been. As we pass through the gate of the year I can’t tell you what the oil price will be tomorrow let alone in 90 days time. However, there is plenty more that is predictable. Fortune favours the brave.
Have you ever looked at someone and thought how did they get there? Maybe their new job alert on LinkedIn, a sudden shift in seniority or even an upgrade in their car or housing situation triggered the question.
Crystal ball gazing is an entertaining but hazardous occupation and let’s be honest, who accurately predicted that a 40% drop in the price of crude oil lay ahead? That said, heading in to 2015 there are certain steps which can be taken to ensure the UKCS is sustainable and competitive on the assumption of a low oil price in the mid-term.
The precipitous decline in oil prices during the past six months creates the sort of economic upheaval that’s likely to alter the course of companies and countries. Brent crude has been steadily falling since mid-June, and now sells for almost half the $115 a barrel it did then. Even if oil prices rebound in a few months – which isn’t likely – the Bust of 2014, as it will become known, is going to leave a lasting mark. We’re already beginning to see reactions in the energy industry. Earlier this month, ConocoPhillips, the biggest U.S. independent producer, said it would slash its 2015 capital budget by 20 percent. A few weeks earlier, Halliburton announced plans to buy oilfield service rival Baker Hughes for $35 billion, which was quickly followed by plans to shed 1,000 jobs in the Eastern Hemisphere. In mid-December, chief executive David Lesar said more cuts could follow next year as the market for drilling services weakens. BP CEO Bob Dudley emphasized recently that his company’s costs are too high to compete in an environment of lower crude prices. The company plans to cut jobs and may also close or sell some sites or plants, Dudley said. BP, of course, has long been rumored as a takeover target, with Shell mentioned as the most likely suitor. BP’s shares have trailed its peers since the Deepwater Horizon disaster in April 2010, and greater clarity on the extent of liabilities from that case, combined with lower oil prices, could make it more vulnerable to a buyout. The industry hasn’t seen a mega-merger like that since the bust of the late 1990s.
There has been an increased focus on the energy industry in recent weeks and months as a result of quickly decreasing oil prices. A key objective for the industry in 2015 will be to identify where savings can be made whilst maintaining optimum exploration and production activity. As a result, government support is required to ensure the industry is sustained. Some positive changes were announced in the Autumn Statement, including a small reduction in the rate of the supplementary charge and the extension of the ring fence expenditure supplement. However, those in the industry will be lobbying hard for further reforms to the oil and gas fiscal regime. We already know of several areas that the government, together with the Oil and Gas Authority (OGA), will be focusing on in the New Year.
Happy new year. As the dust settles on a momentous year in Scotland's history, thoughts turn to 2015, a year likely to be highly significant in the future of the North Sea. Returning to work in January, we contemplate life under a new regulator, changes in taxation and further mature sector challenges. All of this is, of course, underpinned by plummeting global oil prices which have paralysed new investment, leading to painful cutbacks across Aberdeen. The International Energy Agency (IEA) sees oversupply continuing in to 2015 although price predictions invariably confound analysts; how to forecast the relative impact of American shale, Saudi market-share strategy and post-Ukraine sanctions on Russia? High prices may be some way off, however, as cheap oil is seen by many importing nations as the biggest and easiest GDP-booster out there. Low prices may well lift the global economy in 2015 (and perhaps have political consequences amongst beleaguered exporters).
Having reached 2014 highs in June, crude oil prices started to free fall and in the search for reasons some people have pointed towards the International Energy Agency's (IEA) changing demand and supply expectations. Since June, when its 2014 global oil demand growth forecast hit a peak of 1.4million barrels per day (bpd), IEA’s projections have fallen by half. By contrast, supply expectations have been much more stable – since June, the IEA's forecasts of non-Opec (Organisation of the Petroleum Exporting Countries) oil supply growth have expanded by a modest 300,000bpd and the IEA's non-Opec supply forecast is currently only 100,000bpd above the level at which it started 2014.
Once the details of the summit are announced, Aberdeenshire Council will make sure it is fully involved. The oil and gas industry is incredibly important, not only to the North East economy, but to the economy of Scotland and the rest of the UK. We have established good working relationships with the private sector over many years and understand the challenges facing the energy industry today. The area benefits when oil prices are high, but this also brings challenges impacting on house prices and affecting the local recruitment market. It’s important that we consider the impact of falling oil prices, the likely effect on the economy and steps we can collectively take to support the industry.
The offshore union RMT welcomes the announcement of a North Sea oil summit by Aberdeen City Council. As a representative industry body there are a number of areas we feel need to be addressed in the current climate: People - RMT has major concerns about the impact of cost-cutting across the sector. We are hearing from workers with several different operators (Total, Apache, Shell and others) that terms and conditions are to be slashed in an effort to reduce costs. The most worrying element of these cuts are the proposed changes to working patterns which could see workers currently working 2-weeks on, 3-weeks off, being altered to either two-on, two-off or three-on, three-off. These changes if pushed through will see significant redundancies and a loss of experience and 'corporate memory'.
As Leader of Aberdeen City Council I felt it was important to try and take a lead on how politicians interact with the Oil and Gas Industry. Aberdeen is a global city that has achieved so much success thanks to the Oil and Gas industry being on our doorstep. It concern us all that the price of oil has dropped so heavily in such a short space of time and whilst we accept there will always be fluctuations in the price of oil I believe the time is now right for the industry and governments at all levels to work together to maintain confidence in the North Sea.
At a difficult time for the oil and gas industry when we are addressing a range of challenges including the rapid, steep drop in oil price, we can fully appreciate why Aberdeen City Council has called for an oil and gas summit. We are well aware of the concerns across the region regarding jobs and the future for businesses in the area and recognise that a summit, which involves the participation of such a wide cross-section of politicians, industry representatives, and trade unions, will focus minds and join effort on what needs to be done to sustain Aberdeen's position as the oil capital of Europe. We welcome this positive and collaborative approach, but it is also important to acknowledge the truly constructive work being undertaken by the industry and the Government on a number of fronts to help secure the next phase of development on the UK continental shelf (UKCS).
It goes without saying that if you work offshore, you work in a physically demanding and hazardous environment. So when the European Court of Justice rules that obesity can constitute a disability, then of course safety must come into the discussion. Before we get into things, we must remember that the EU’s judgement states that obesity is only classed as a disability in certain circumstances, not in every circumstance. It’s only a disability if the person has a long-term impairment that has been induced by their weight.
In these interesting times we may need to look outside our usual patch to keep our people busy through 2015. But Bethlehem? OK, not exactly Bethlehem, but perhaps not far away from that little town. Israel just announced a major new gas discovery (reportedly 3.2 trillion cubic feet). While many of us were transfixed by the oil price, Israel was holding its first ever international oil and gas conference. There used to be an Israeli joke that Moses had delivered the Jews to the only place in the Middle East with no oil or gas.
As we watch the oil price go down, with no indication of how low it will go or how long this trend will be sustained, it’s increasingly clear that the impact of this – alongside a double whammy of falling production levels plus cost inflation - is being keenly felt by operators across the UK Continental Shelf (UKCS). In recent weeks, we’ve seen Christmas parties cancelled, free meals curtailed and shareholder revolt on CEO pay as well as plans to cut onshore and offshore contractors pay in 2015. There is also the prospect that up to $150bn of global projects could be labelled as uneconomic next year, resulting in them being mothballed or cancelled altogether.
Tightly wrapped under our Christmas tree is my son's first rugby ball. As his appetite for the sport grows he'll soon learn the rules and watch highlights of some of the most historic games. And then maybe somewhere down the line, a coach, a teammate or a fellow fan will teach him about the very important 'game of inches'. I can't help but think the industry, now more than ever, could take a cue from this sport's playbook. Humphrey Walters, who is known in both sport and business arenas, coined the phrase.
There is no doubt that the oil and gas sector is facing challenging times – on-going cost pressures and the fall in oil prices are reducing margins for both operators and supply-chain companies, and it is important that Government does everything it can to support the industry during this period. I believe that North Sea oil is a fantastic asset for Scotland and will continue to be so be for decades to come. There are up to 24 billion barrels of oil and gas equivalent remaining, and it is essential that we have stable and proportionate fiscal regime which encourages the investment, innovation and exploration required. This is even more important in light of the recent job losses in the sector.
I read with real concern the comments yesterday that the UK offshore oil & gas industry was “close to collapse”. These comments are over the top for an industry which thinks and plans long term, has significant momentum from current production and from major investments made over the last two or three years, and where the operators make their investment decisions based on the anticipated price of oil in two to three years’ time. It’s important to have a balanced perspective at this time. The UKCS does face a very difficult year to 18 months which will see a slow down in investment, the loss of some offshore production, up to 10%, and the possible loss of around 15,000 jobs within an industry which employs 375,000, although this is difficult to estimate. It will be a tough time for the industry and the people that work in it, but we are entering a downturn from which we will recover.
There is no doubt these are worrying times for the North East of Scotland. Not just for those in the industry but also for the businesses and jobs that rely on what the oil industry does for the local economy. But the North East of Scotland has seen many a storm before, and weathered them all. With the support of the new Oil and Gas Authority, and the UK Government – particularly the tax breaks which I have implemented at the Treasury – we can certainly weather this one, and even emerge stronger and more resilient. That’s not to say that the fall in oil price to below $60 a barrel is not troubling. Oil and Gas UK’s figures suggest that only about 10% of projects are unprofitable at this level, but that’s still 10% of an industry that employs around 240,000 people across the supply chain. I know that a lot of people reading this today are genuinely worried about the future.
The UK Government moves like lightning to tax the industry when oil prices are high but moves at a snail’s pace when oil prices are low. In a glaring example of oil tax hypocrisy, George Osborne announced a shale oil fund for the north of England in his Autumn Statement. This is before a single barrel of oil has been produced, yet, Scotland, with more than 40 billion barrels of oil is still waiting.
The big economic development this year was one which no economic forecaster had predicted – a dramatic drop in the crude oil price. Brent crude has fallen around $50/barrel from the average price in 2011-13. The most significant impact so far has been on Russia and the value of the rouble. The other very large oil producers in the world – Saudi Arabia and the United States – should be less heavily affected. The US is a net oil importer so consumers will gain more than producers lose. Saudi Arabia has very strong financial reserves to weather the storm.
Yesterday, the European Court of Justice issued its judgement in the case of Karsten Kaltoft, a 5ft 7in child minder from Denmark who, in his 15 years in that role, has never weighed less than 25 stone. Mr Kaltoft's employment was terminated, and he felt that it was on the grounds of his obesity. The European Court of Justice was asked to rule on two key questions: First, is it unlawful to discriminate against someone on the grounds that they are obese? Second, can obesity amount to a disability, which it is unlawful to discriminate against?
North Sea “close to collapse” says the man from Brindex. I am of course referring to remarks made to the BBC by its chairman Robin Allan, who then goes on to say that the UK’s offshore industry has been in such territory before. The 1986 oil price crash was a shocking event and did terrible damage at the time. However, it also marked the start of a turning point as the North Sea gradually started to mature. Various initiatives in the 1990s designed to tackle key issues like rocketing costs helped and they were timely given the next slump that started with a gradual oil price slide in 1997, bottoming out in late 1998 at less than $10 a barrel for a few days.