UK Oil Industry Collapse May Be Overstated

Robin Allan, chairman of the independent explorers' association Brindex, has spoken out on the dire situation in the UK’s oil and gas industry saying it is “close to collapse” as new North Sea projects cannot be profitable with oil prices dropping below $60.

Oil prices have fallen dramatically since November when OPEC decided against cutting output to keep prices stable. Allan says the industry is adapting to the low prices by slashing jobs and projects. People are being laid off at most companies, and it is painful for the country, he says.

However Wood Group owner Sir Ian Wood has spoken out against the idea that the industry is close to collapse. Although it is a difficult time, he believes oil prices will recover in late 2015 or early 2016.

In a statement released on Friday, Wood said: “I read with real concern the comments that the UK offshore oil and gas industry was “close to collapse”. These comments are over the top for an industry which thinks and plans long term, has significant momentum from current production and from major investments made over the last two or three years, and where the operators make their investment decisions based on the anticipated price of oil in two to three years’ time.”

“The UK Continental Shelf does face a very difficult year to 18 months which will see a slow-down in investment, the loss of up to 10 percent of offshore production, up to 10 percent, and the possible loss of around 15,000 jobs within an industry which employs 375,000, although this is difficult to estimate,” says Wood.

“The Chancellor’s Fiscal Review, which is ongoing, some of the key details of which were announced in the Autumn Budget Statement last month, contained important, helpful fiscal measures. The headline tax rate is reduced by two percent but more importantly, urgent steps are underway to introduce field allowances which will provide incentives for new field developments and capital investment in existing fields and these should be effective. The proposals to stimulate exploration will definitely encourage sentiment towards investment as the oil price recovers. Treasury has given assurances that these will be in place at the March 2015 Budget.”

Wood, who recently led a government review into maximizing North Sea output, says that the industry should use the downturn to become leaner and more efficient.

Wood Group employs approximately 12,000 people onshore and offshore in the UK. Earlier this week Wood Group PSN, a division of Wood Group that provides services to the oil and gas industry, announced a pay freeze for staff and rate cuts for its contractors. Dave Stewart, UK managing director of Wood Group PSN explains: “Our customers are focused on prioritizing their spend and according to Oil & Gas UK’s latest activity survey, production in the sector dipped eight per cent last year to an average of 1.43 million barrels of oil equivalent (MMboe) per day. Escalating costs at any level has a domino effect on any mature sector and we want to help the long-term health of the industry.” 

Other companies are taking similar measures. ConocoPhillips is axing 230 out of 1,650 jobs in the UK, and earlier this month a spokesperson for the company announced a 20 percent reduction in the company’s capital expenditure budget worldwide. Apache is also cutting contractors’ wages from January 1. Schlumberger has cut back its UK-based survey vessel fleet and is also axing jobs. 

Currently, around £55 billion ($86 billion) worth of future oil projects face cuts or cancelation, according to leading UK accountancy firm Moore Stephens. Earlier this year, a study conducted by the UK Department of Business, Innovation & Skills and safety body Optio predicted as many as 35,000 jobs could be lost over the next five years.