A YEAR ago, there was some hope that the oil price would have started to recover by now. But with OPEC no nearer to agreeing a deal to curb production, it looks like a price of $40 to $50 a barrel is the new reality for the foreseeable future.
In response, a report from Oil and Gas UK has tried to be as positive as it can be about the situation, drawing attention to an increase in production. But in the end there is no escaping the truth about the industry in the UK: the picture is grim and the prospects are poor.
Naturally, Deirdre Michie, the chief executive of Oil and Gas UK, is keen to suggest the industry is getting to grips with the situation and, in her introduction to the latest report, is consciously upbeat. Companies have grown accustomed to the new oil price, she says, and are positioning themselves to survive in the long-term although the report also says there is a lack of new development and calls on more tax relief to reduce costs further and make more projects viable. Should this happen, says the report, the industry can still make the most of the billions of barrels of oil that are yet to be recovered.
However, the reality is worse than the report admits. The cost of extracting oil or gas has been dramatically reduced but this has been achieved largely through what the report calls efficiency improvements – in other words, thousands of people losing their jobs. Uneconomic fields have also been closed down, perhaps never to open again, and suppliers have been relentlessly squeezed.
In the short term, the tactic is working because it is reducing costs, but the industry can only do that for so long. As a strategy for the future of the sector, it does not have very much further to go.
The report does point to some other areas that have potential to help, in particular decommissioning, although there is still a worrying shortfall in skills and technology in Scotland. The work that service companies pick up in this sector is also not enough to compensate for what they are losing and of course decommissioning only happens when fields have become exhausted or are too expensive to exploit – in other words, the growth of decommissioning, while positive, is a sign of the broader malaise.
The Oil and Gas UK report says another problem is a lack of investment in development, which in the past has been driven by smaller firms looking to the future. The problem is those firms are now finding it hard to get the money they need while the big players focus on the plum fields off Shetland. If development is to continue, firms must find ways of working more closely together.
The question of tax relief is also important. The UK Government has already cut revenue tax, but what Oil and Gas UK would like to see is a tax credit scheme. It is an idea worth pursuing, but only on the condition that companies invest the money back into the industry; there would also need to be a mechanism by which the taxpayer would, in time, get a fair share of any profits.
As Oil and Gas UK says, there may be good profits to be made again in the long-term, but it is only likely if every partner in the industry and government plays their part.
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