Oil prices sank to their lowest on the UK stock exchange for five and a half years, sliding down 3% from the previous session amid a global oil glut as Middle East, Iraqi and Russian oil producers keep pumping at record high levels.
As a result, global oil exploration investment and capital expenditure is being slashed and – as we reported earlier yesterday – the head of Britain’s oil and gas industry trade body has admitted that ‘oil and gas exploration in the North Sea has virtually dried up’ amid a continuing oil glut, which has seen the benchmark Brent Crude oil price almost halve in the past six months.
Malcolm Webb, outgoing chief executive of Oil and Gas UK, the London-based trade association, also confirmed that North Sea faces a difficult 2015.
Globally, industry analysts forecast that almost $1 billion of new oil exploration will be axed this year as crude prices languish at around the $55-barrel level.
Jim Murphy said: “The industry is going through what oil workers have described as a crisis period. At the time of writing, the oil price has fallen below $52. That’s less than half the price predicted by the SNP in their White Paper, which formed the economic basis for their independence case.
“But more immediate than the politics is the fact the plummeting oil price has resulted in a number of firms cutting the wages of their staff. The jobs and livelihoods of thousands are at risk. That’s why it’s so important that the Scottish and UK Governments do everything within their power to secure the jobs of thousands of oil workers.
“I want the Scottish Government to create a resilience fund to be used in times of crisis for some of Scotland’s crucial industries and to deal with the consequences of large scale redundancies on local economies. I also want the Edinburgh Government to use its power over business rates to support industries experiencing unforeseen and exceptional change, a change that of course would be subject to EU state aid rules.
“That means consulting on how it would be possible to cut the business rates employers have to pay during this time of great uncertainty or looking at support for small businesses as a result of large scale redundancies. The small firms that depend so heavily on work from the North Sea need support.”
In reply, Scottish Energy Minister Fergus Ewing (left) said: “Jim Murphy’s belated conversion to backing an oil fund is welcome, especially after he and his Labour colleagues failed to deliver a single penny by refusing to establish such a fund when they were in office and had the chance.
“We have long called for the UK to set up such an oil fund – calls which have been ignored by successive Labour, Tory and Lib Dem Westminster Governments, despite receiving billions of pounds in revenue from more than four decades of North Sea production
“Current <low oil> prices are nothing new – in 1999 they were close to $10 a barrel, and Norway had only just started to invest in its oil fund, which is now worth more than £500 billion and is the biggest sovereign wealth fund in the world, growing by an average of $165 million every day over the last 13 years.
“Oil is a bonus, not the basis of Scotland’s economy, and will be a fantastic asset for decades to come – many independent international forecasts expect the price to rise again this year, with OPEC predicting a price of $110 per barrel for the rest of the decade and around $100 in real terms in the long-run.
“The Scottish Government last year invested £15 million in the oil and gas sector via Scottish Enterprise and a further £10 million investment in the Oil and Gas Innovation Centre.
“In addition, hundreds of companies supported by our enterprise agencies are expected to increase export sales and turnover by hundreds of millions of pounds.”
The creation of a Scottish oil ‘sovereign wealth fund’ – similar to that set up by Norway last century – was a central element in the SNP-led Scottish Government campaign last year in favour of a ‘Yes’ vote in Scotland’s Independence referendum.
Meanwhile in Oslo, speculation is growing that the central bank of western Europe’s s biggest crude producer will need to cut rates again as oil continues to wholesale at prices below $55 a barrel,
A 54% slump in benchmark Brent crude since June 2014 has pummeled the offshore industry in Norway – where oil and gas make up 22% of gross domestic product. The Norwegian central bank delivered a surprise cut in interest rates last month which it said was triggered by plunging crude prices.
Since then the oil price development has proven even worse than the central bank anticipated. In an interview yesterday, Governor Oeystein Olsen said $55 oil is “clearly lower” than expected in December 2014.
Brent crude will need to trade above $70 a barrel before pressure on monetary policy abates, Olsen said. Since then, the price of Brent crude oil has dropped 14% to its lowest level in more than five and a half years.
In the UK, city observers do not anticipate any rise in UK bank base rates – presently at 300-year lows of ½ per cent – until 2016 at the earliest. Meanwhile, the dive in wholesale oil prices is leading to a range of reductions in garage forecourt price cuts – putting petrol at around £5 a gallon for the first time since 2009.
Meanwhile, UK Chancellor George Osborne has warned that it is “vital” for the fall in oil prices to be passed to consumers. He raised the issue at Cabinet last night, saying the government would watch the industry “like hawks” to ensure savings were passed on.
The Treasury said it was examining whether any action was needed. A spokesman said officials were conducting studies into whether industries are passing on the fall in oil prices to consumers.
The price of Brent crude oil has now fallen to $51.12 per barrel – its lowest level since March 2009 – six months ago it cost $115.
See also Scottish Energy News 5 January 2015
Sir Ian Wood: “N. Sea oil and gas industry faces loss of 15,000 jobs in 2015” – http://goo.gl/hMyD6q
“Crude price ‘tax cut’ good for UK plc – but Aberdeen oil and gas sector set to suffer” – http://goo.gl/bsqm1o
Meanwhile, hedge-fund manager Andurand Capital returned 38% in 2014 betting on the collapse in oil prices, emerging as one of the biggest winners from the near halving in crude since June.
French fund manager Pierre Andurand, who made his name in 2008 by calling the sharp rise and subsequent collapse in oil prices that year at his BlueGold fund, launched Andurand Capital in 2013.
He said: “There needs to be real pain in the oil market before the price can go back up,” predicting a number of high-cost producers would go bankrupt before the U.S.-led surge in shale supplies slowed enough to balance the market.
A DECC spokesperson commented: “While the recent sharp reductions in oil prices are challenging for companies active in the North Sea, we have seen very little evidence of new projects being cancelled or deferred in reaction to lower oil prices. Meanwhile, Government continues to work hard with industry leaders to address the challenges the industry faces and to maintain Britain’s energy security by maximising the economic recovery of our domestic oil and gas resources, offshore and onshore.”
Malcolm Webb, chief executive of Oil & Gas UK, added: “The UK oil and gas industry is facing a particularly testing time with the sharp decline in oil price. If we are to maximise economic recovery of the UK’s very substantial oil and gas resources, we need all stakeholders to work collaboratively to that end and particularly so at times like these.
“Constructive work is already being undertaken by industry and government on several fronts. Fiscal reforms announced in the Autumn Statement were welcome first steps in reducing the overall tax burden on this industry but further measures such as the proposed investment allowance must be put in place in time for the coming Budget. We now need further significant reductions in the Supplementary Corporation Tax. The new Oil and Gas Authority must also work swiftly to exercise a more effective stewardship of the UK’s oil and gas resource.
“The meeting with Scottish Labour Party leader Jim Murphy presented a valuable opportunity to bring him up to date with the state of the industry and discuss the range of measures which both industry and government need to take in order to safeguard the sector and the crucial economic and social contribution it delivers for the UK. We were greatly encouraged by Jim Murphy’s agreement on the importance of timely results from the work currently underway with the Treasury to reduce the tax burden on the industry and also by his continued support for swift and full implementation of the recommendations of the Wood Report.
“Given the importance of collaboration between all stakeholders at this time, Oil & Gas UK continues to support Aberdeen City Council’s proposed Oil and Gas summit. Furthermore, given the need for the industry to urgently reduce its own costs and increase its efficiency, Jim Murphy’s proposal to introduce a resilience fund which can be used by Local Authorities to help persons affected by adverse economic conditions seems sensible.”