North Sea oil fields are on the verge of losing money for every barrel they produce, according to a survey of industry forecasters carried out by The Independent.
Future exploration, investment and tens-of-thousands of jobs are all said to now be under threat from falling global oil prices, with up to a third of the North Sea already nearing loss-making territory.
There have been calls for a 50 per cent cut in North Sea taxes as 100 fields were said to be in danger of closing as the crisis deepened.
Oil and Gas UK (OGUK), the voice of the offshore industry, predict that if oil prices plummet towards $40 and below, only major companies such as BP and Shell will be left producing in the North Sea at ultra-thin levels of profit.
“Some companies are paying 80 per cent as the highest tax rate on fields in the North Sea” said OGUK head Malcolm Webb. “We would like to see 30 per cent as the top tax rate and our industry treated as the same as any other.”
Today, BP announced that it was responding to “toughening market conditions” by cutting 300 jobs from its 3,500-strong North Sea workforce, reducing contractors pay and implementing wide-ranging cost-cutting measures.
To many in the industry, it suggests much worse lies ahead.
Tullow, with production interests in 28 countries, is also among firms expected to announce job cuts to its North Sea operations.
Cairn, who operate deep-water wells in the Atlantic Basin off Senegal, are also predicted to opt for investments in Africa and defer its North Sea plans.
In Aberdeen this week a private seminar of industry experts concluded that: “No one knows how dire the situation is going to get, or at what price companies in the North Sea will be left operating with ‘negative cash flows’”. A company spokeswoman said “no one had any answers.”
World oil prices have fallen by 60 percent in the last six months, a catastrophic slide since last June when trading was above $115 a barrel. Previous global forecasts now look like fantasy maths.
The Anglo-Dutch giant, Shell, announced they are scrapping or deferring billions of dollars in planned projects, including a $6.5bn deal with Qatar. The Norwegian major, Statoil, said it was handing back three “frontier” exploration licences in Greenland.
For the North Sea, energy consultants Wood Mackenzie are forecasting that falls in overall production cannot be ruled out. Research analyst, Robert Plummer, said that at $40 or below for a barrel for Brent, production shut-downs would happen. That option would be drastic for mature fields in the North Sea who normally adopt a “use it, or lose it” strategy to produce oil at a loss rather begin high-cost decommissioning which can run to hundreds of millions of dollars.
However northing is normal in the North Sea at the moment. Mr Plummer said many North Sea fields were old, reaching the end of their viability, and at $50 a barrel, the UK was among 17 countries producing oil that was “cash negative” – losing money.
In 2008 Goldman Sachs predicted that crude oil would be operating for a lengthy period at $200 a barrel. Last week the US investment bank said the barrel-price of Brent, the North Sea’s category, was likely to fall below $40.
Alistair Winter, chief economist at the global investment bank, Daniel Stewart & Co, said: “I can see it [Brent Crude] go below $40, perhaps down to as little as $20. Marginal fields, often run by smaller companies, need around $60 a barrel for viability. But markets will already be “shorting” petroleum prices [betting on prices falling further to make profit] - and that points to bad news ahead for the North Sea.”
Mr Winter said the UK oil industry was a casualty of the production price war between OPEC [the Organisation of Petroleum Exporting Countries], dominated by Saudi Arabia, and the accelerating production levels of shale oil resources in North America. He added “OPEC countries need and want the current cash-flow from their oil. There’s little chance of a cut-back in supply any time soon. The North Sea is simply caught in the middle.”
Financial risk analysts, Company Watch [CW] , estimate that 70 percent of the UK’s publicly-quoted oil exploration and production companies are already suffering substantial losses. CW estimated their cumulative losses may already have passed £2 billion.
Smaller privately owned companies could be in even worse shape. Research by CW say accounts in this sector show accumulated losses of $12 billion plus.
The Department for Business, Innovation and Skills, recently forecast that 35,000 North Sea oil-related jobs could be lost over the next five years. That forecast was made before the current price slide. Cash-strapped small producers may have to defer planned investment over the next two years, or burn through cash reserves to help them survive the OPEC-US price war. Reductions in future investment could, according to analysts, push job losses beyond 50,000 – four times the jobs lost when British Steel abandoned Ravenscraig in 1992, still regarded as one of Scotland’s worst economic disasters
Alex Kemp, professor of petroleum economics at Aberdeen University’s Energy Research Centre, said the “panic button” in the North Sea oil industry may have been pressed, and there was “cause for concern” that planned new projects would be stalled and exploration budgets would be cut.
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