WOOD Group has said it will slash the pay rates of 1600 contractors in the UK, who earn an average of £110,000 a year, by 10% to help curb what the oil services giant said were unsustainable costs increases in the North Sea.

With one its biggest rivals, Amec, reviewing the pay rates for contractors, the move could herald a big shake up in the industry.

The cuts planned by Wood Group will affect 300 people in Glasgow and 1100 in Aberdeen working in areas like piping engineering.

Loading article content

They will result in the average annual pay rates for onshore contractors used by the group falling by £11,000, to £99,000.

Contractors working for Wood Group who are based offshore are not affected.

Aberdeen-based Wood Group said it was acting to try to safeguard the future of the North Sea where there are billions of barrels of oil and gas still to be recovered.

The company is concerned that the costs of working in the North Sea are spiralling, as oil and gas firms try to ramp up production to meet strong demand for energy

"The UK oil & gas sector's operating costs rose 15.5% last year to a record $14.8billion (£8.8bn)," said Dave Stewart, managing director of the Wood Group PSN operation in the UK. This helps firms secure the most out of existing assets.

Mr Stewart added: "We don't believe this is sustainable, and we need to control costs to help maximise economic recovery and to safeguard the future of the North Sea."

He said the soaring rates paid to contractors could make oil and gas firms decide it is not worth investing in some North Sea fields.

"The North Sea is a relatively mature sector and we believe this kind of decision isn't optional, it's necessary," said Mr Stewart.

Wood's move may be welcomed by firms that produce oil and gas off the UK.

Led by chief executive Bob Keiller, Wood Group intends to pass savings resulting from cuts in contractors' pay to clients.

Oil & Gas UK said the ongoing increase in contractor rates was highlighted at a recent industry meeting.

Dr Alix Thom, employment and skills issues manager at the industry body, said: "Our industry faces competition for people with the right skills and experience to overcome the challenges of production in the United Kingdom Continental Shelf but we must pull out all the stops to ensure that this doesn't make operating here too expensive."

The move is also designed to give Wood Group more control over the supply of skilled labour for its North Sea projects.

The company wants to encourage more people to opt to become employees rather than working as self-employed contractors.

Mr Stewart said that, over the last five years, contractors' rates had risen three times more than staff rates.

Wood said contractors may be able to transfer to staff jobs. It has over 100 vacancies for engineering staff.

The move appears to involve risks for Wood Group at a time when some skills are in short supply in the North Sea.

Experts have warned that skills shortages are one of the biggest challenges facing the UK industry, which faces competition from other oil and gas producing areas around the world.

But Wood Group did not show concern.

The company said it will implement a 10% rate reduction to UK-based onshore limited contract workers in Wood Group PSN from June 1.

Around 200 contractors based in offices in England will be affected.

The changes will affect contractors working mainly in technical functions such as project, construction and commissioning engineers.

Wood Group PSN has 5900 onshore staff and 1600 onshore contractors.

It employs 4600 people offshore in the UK but only uses around 150 contract personnel.

A spokesman for AMEC said: "We confirm that we are reviewing the pay rates of our onshore and offshore contracting personnel based from our Aberdeen locations from 1 June 2014.

"This decision is to ensure not only our own competitiveness but also that of the UK oil and gas industry in the future."