How downturn in oil price could benefit Scotland's offshore sector

The stark warning that the sector was facing a "huge crisis" and could lose almost half of its 65,000-strong workforce came from the independent explorers' association, Brindex. Chairman Robin Allan - whose own company Premier Oil suffered a 28% fall in its share price - said it was "almost impossible to make money at these prices".

But the claim - accompanied by calls for urgent tax cuts to boost exploration and production - was last week rubbished by energy veteran Sir Ian Wood, who said it was "well over the top" and that the likely jobs losses over the next year to 18 months would be closer to 15,000.

Although he concedes North Sea ­production could fall by 10% if prices continue to slide, Wood also predicted that conditions would begin to recover next year, saying "there are reasons to believe that the industry should be in better shape to attract even more investment then, because of the initiatives currently under way".

A look at the price of benchmark Brent crude over the last three decades (see table) shows that prices have, from a historical perspective, been unusually high and stable in the last four years. So talks of a crash in prices are only relative. It could equally well be said that the oil price has corrected to somewhere closer to its historic average.

The price of Brent hovered around $20 per barrel for much of the 1990s, with a record low of $8.75 in July 1996. Throughout the noughties the price rose steadily from $25 per barrel in 2000 to a high point of $145.61 in July 2008, just before the global financial crash which saw the price of Brent slide, within the space of six months, to $41.58 by the end of 2008.

Throughout 2009 and 2010 the price steadily increased. Since February 2011, the price has consistently been above $100 price barrel.

Claims the industry will collapse if prices fall below $60 a barrel have to be set against an average price of $41.81 of Brent crude in the 32 years, during which time the industry has mainly flourished.

So, while it appears that the industry will have to get used to lower oil prices for the next few years, the challenge from prices is no greater than the North Sea oil industry has experienced for most of its history.

Looking forward, market analysts Oxford Economics said last week that oil prices still face pressure from slumping Chinese demand, strong shale ­production from the US and strong supply from the Opec cartel, but nevertheless expects prices to rise to $111 per barrel by 2020 and $200 per barrel by 2040.

According to Robin Clarkson, a ­partner in the Aberdeen oil and gas team of Burness Paull, one of Scotland's leading law firms, while some short-term pain is inevitable, over the long term lower oil prices will force operators in Scotland to become more competitive.

"It is important to remember that the oil price has historically been cyclical and fluctuates," he said. "For the last three years, the oil price has been unusually stable and quite high. Because of that long period of high prices, the cost base has grown to a level where it is now unsustainable."

But the sector has been facing the ­problem of uncompetitively high prices for some time before oil prices went into freefall in the summer, and there are already signs of prices dropping: the daily rental price for a semi-submersible ­drilling rig has fallen from more than $400,000 a year ago to less than $250,000 now.

If prices fall below $60 per barrel, some exploration and production projects in the North Sea and northern Atlantic could be put on hold, Clarkson admits. But he expects oil prices to stabilise before rising next year to between $80 and $90 per barrel.

When the price of oil has gone down in previous decades, the industry has always reacted quickly by examining high contractor rates and employee head counts.

This time around it is no different: the issue of high prices in the UK sector of the North Sea has been on the radar at least since the publication in February of the Wood Review on maximising the recovery of oil and gas reserves from the UK continental shelf (UKCS).

Earlier this month, Wood Group, the Aberdeen-based multinational oil and gas services firm, said it was cutting rates for self-employed contractors by 10% and freezing pay for onshore employees. According to Clarkson, it is likely this lead will be followed by other companies.

"I am confident that in a year's time there will not be the same level of concern hanging over the industry," Clarkson said. "The hope I have, which I think will be borne out, is that the current low price of oil will drive efficiencies in the industry, make companies work more effectively to reduce costs and lead to a more ­sustainable industry."

The UK Government's Department of Energy & Climate Change claims there is so far "very little evidence of new projects being cancelled or deferred in reaction to lower oil prices".

And there has so far been no sign of firms rushing to pull out of Scotland's oil industry. Just two weeks ago the Spanish energy giant Repsol showed its faith in the future of the UK sector of the North Sea by buying up Talisman Energy (which also has interests in North America, South-east Asia, Columbia and the Norwegian sector of the North Sea) for £8.3 billion.

In addition, last month oil giant BP unveiled plans for a third development phase of the Clair oil field west of ­Shetland at a likely cost of £6.3m to £9.4bn.

Industry veteran Francis Kiernan of the Aberdeen-based oil and gas ­consultancy ABIS Projects, who has experienced several industry downturns during his 30-year career in the sector, also thinks low oil prices are a potential force for good that will, perhaps counter-intuitively, create more opportunities for the sector.

According to Kiernan, the oil price drop, combined with high production costs - up 62% since 2011 - will force companies into more innovative ways of working, which will deliver cost-efficiencies and greater value.

"The industry has lost sight of ­achieving optimal value for minimal cost," he said. "We need a much better alignment of cost and value. The cyclical economics of oil and gas are nothing new and we are already dipping into a downturn. I reckon we will have three years of challenging times before we get back to the highs of this summer.

"These challenges are going to be similar to the ones we faced in the early nineties when the UK continental shelf contracting model changed dramatically, when there was fundamentally a balance sheet transfer from the oil company to the supplier."

In the months to come, Kiernan believes, oil companies will have to focus on being smarter and look at creative opportunities to work with suppliers which have the flexibility to expand in a contracting market because they are willing to work more innovatively. This will allow oil companies to shift their focus forward to exploration and development.

"While this is not good news for the big service companies, which need to pursue volume and service their overheads, it is good news for the smaller companies which can interpret and deliver what an oil company needs, and meet that need through a boutique service with high-end intellectual property and value."

In Scotland, lower petrol prices will bring Christmas cheer for consumers and distributors and this is expected to lead to an upswing in consumer demand.

But Inverness-based economist Tony Mackay warns that Scotland's economy as a whole will suffer if - as now expected by futures markets - oil prices remain below $80 as the oil industry accounts for about 4% of the country's economic output.

High prices of over $100 per barrel for the last four years have been a great benefit for Scotland and have allowed the development of new fields such as Golden Eagle and Kinnoull as well as the extension of the Clair and Forties fields.

The current record high level of ­capital expenditure on new field development projects (£13bn this year) will, Mackay believes, continue at a high level through until 2016.

But thereafter, unless there is an uptick in prices, planned developments such as the Bressay field east of Shetland and the Rosebank field west of Shetland could be cancelled. Producing fields with high operating costs could be closed down earlier, and the decommissioning of ­platforms brought forward.

Mackay expects at least 5000 offshore and onshore job losses in the industry in 2015 and possibly as many as 10,000, with the decline effecting both the North Sea and northern Atlantic industry as well as valuable export markets for services and technology such as west Africa and the Middle East.

But he agrees that a sustained period of low prices could have positive side-effects. Wage rates on the UK side of the North Sea are now considerably higher than in the Norwegian sector, even though the cost of living and taxes are higher in Norway.

The average UK offshore worker now earns £90,000 for a 26-week year. This compares with the £70,000 earned by the average Norwegian offshore worker and with a UK national income average of just in excess of £25,000.

"There has been a huge increase in costs and wages because of the high oil price," Mackay said. "We certainly have become less competitive over the last two to three years and the fall in oil price could begin to reverse this trend."

The International Monetary Fund estimates that every $10 fall in oil prices will increase world economic growth by 0.2%. There might be supply glut now but, as global growth increases, demand will increase and sponge up the excess.

While oil-dependent countries such as Russia, Nigeria and Venezuela are feeling the pain of lower oil prices, the general consensus among economists is that the global economy will experience a net gain and countries that have been teetering perilously close to deflation in recent years could finally be kick-started into a period of growth.

If Scotland's oil industry plays its cards right, it could take advantage of both potential benefits of low oil prices: the opportunity to become more competitive in the short-term and benefit from a growing global economy - itself caused by low oil prices - to eventually selling the world more oil.