BP’s announcement about job losses in Aberdeen was made yesterday because it does not expect the oil price to bounce any time soon.
The oil price has dropped around 60% since June 2014 to $48 a barrel, and I understand that BP expects that it will stay in the range of $50 to $60 for two to three years.
Although no oil company has a crystal ball, this matters – especially since it has a big impact on its investment and staffing ambitions.
So plans that it had already initiated to reduce costs have taken on a new element, namely postponement of investments in new capacity that have not been started, and shelving of plans to extend the life of older fields where residual oil is more expensive to extract.
Aberdeen is an important centre for BP, and it employs around 4000 there. And it is in no sense withdrawing – it is continuing to invest in the Greater Clair and Quad 204 offshore properties.
But the reduction of several hundred in the numbers it will henceforth employ in the Aberdeen area is symbolic of a city and industry that faces a severe recession.
Hardest hit will be North Sea companies with stakes in older fields, where production costs are on a rising trend – and whose profitable life will be significantly shortened if the oil price does not recover soon.
The reason BP expects the oil price to stay in the range of $50 to $60 for some years is because it is persuaded that the Saudis, Emiratis and Kuwaitis are determined to recapture market share from US shale gas.
This means keeping the volume of oil production high enough such that the oil price remains low enough to wipe out the so-called froth from the shale industry – to bankrupt those high-cost frackers who have borrowed colossal sums to finance their investment.
This does not simply require some US frackers to be bankrupted and put out of business, but also that enough banks and creditors are burned such that the supply of finance to the shale industry dries up. Only in that way could Saudi could be confident of reinvigorating its market power.
Meanwhile although the US shale industry is in pain, the lower price will probably reinforce the US economic recovery – and the White House doesn’t massively worry that Russia and Venezuela are in dire economic straits.
If BP is right, most big oil-producing companies will have to write off the value of older, more expensive oil fields. That is particularly true of European companies, because of accounting rules here.
In fact BP is less exposed to such losses than many – because it sold $43bn of mostly older oil properties over the past few years, to pay the enormous bills of its Gulf-of-Mexico oil spill.
But BP can’t be immune to the upheaval. Its job announcement (in Aberdeen) is focused on the UK. But it won’t be long till it announces staff reductions in Houston, another of its important centres.