UK oil and gas is a loss-making sunset industry which ‘is spending more than it’s earning’, Holyrood MPs told

EXCLUSIVE report by Scottish-UK-Energy-News

Investment in new oil and gas exploration in the North Sea has fallen off a cliff, Holyrood MPs were warned last night (1 Mar) in the Scottish Parliament.

This year (2016) oil and gas companies are planning to invest a combined total of around £1 billion in exploration – but this is only 12% of the £8 billion a year invested each year in the past five years.

And Mike Tholen, Economics Director, Oil and Gas UK, also told MSPs; “New investment this year will be very low this year unless we as an industry really get our act together.

“The challenge for the industry is to ensure we remain competitive in a low crude-oil-price world.

• “The sad fact is that the industry is spending more than it’s earning.
• The collapse in the wholesale price of N. Sea crude oil is having a major impact; last year, the UKCS spent £4.2 billion more than it earned (after tax) in 2015.
• “More than 4 in 10 N. Sea oil fields are presently losing money in the c$35-barrel crude world.
• Competition for capital is intense and companies are cutting almost all discretionary investment to survive.

“So the industry is aiming to get to an operating cost this year (2016) of $17-barrel and is aiming for $15-barrel for next year.

“The big issue is how to sustain investment in new finds and new fields through the bottom-end of the downturn cycle. I’ve experienced cyclical downturns before and I’m very passionate that we’ll get through this cycle.

“However, we are unlikely to ever see a return to the days of c$100-barrel for crude oil.”

Latest decommissioning figures from OGUK’s annual activity survey also highlight the scale of the problem. From fewer than 20 fields due for decommissioning this year (2016) – this is due to accelerate fivefold to more than 100 fields coming offline over the next four years to 2020.

The N. Sea basin is now dominated by a handful of Tier-1 global oil giants, with a slip-stream of smaller operators pumping from relatively low-volume fields. The glory days of the Brent field are over – and may never return.

Consequently, Oil and Gas UK is lobbying UK Chancellor George Osborne for tax cuts in the British budget on 16 March including, for instance: –

• Permanent removal of the Supplementary Charge from fields discovered in the next five years (to encourage investment in new exploration)
• Improvements to the efficiency and effectiveness of the Investment Allowance
• A permanent ‘step-change’ cut in headline tax rates to 20% (in line with non-oil industries) – a move which industry guru Sir Ian Wood has independently mooted, and:
• Zero-rating of Petroleum Revenue Tax and retention of first-year capital allowances.

Meanwhile MSPs raised several questions about the pipeline of more job-loss announcements which may be expected from North Sea operators and contractors after David Rennie, Head of Oil and Gas at Scottish Enterprise said that the latest figures available showed a total loss of some 11,000 directly-employed job-losses from the industry in Scotland.

Fears over further sector job cuts were raised by Lewis McDonald MSP (Labour, NE Scotland), Kevin Stewart, MSP (SNP, Aberdeen Central) and Christian Allard, MSP (SNP, NE Scotland).

Anecdotal evidence suggests that many now-redundant N. Sea workers – used to earning £50,000-£100,000 a year – are not registering as ‘unemployed’ as state benefits are so low.