British oil and gas industry employees are bracing themselves for a potential wave of job cuts as the well publicised “credit crunch” tightens its grip on commodities markets.
Industry leaders estimate that as many as 50,000 jobs may be at risk to the wielding of the metaphorical axe of unemployment.
The problem stems from a dramatic decrease investment into the industry. Oil & Gas UK, said in a recent report that capital investment could plummet from £5 billion to as little as £2.5 billion over the next two years. The cut is a product of a shrinking economy and a lack of available capital that could potentially cripple the previously prosperous offshore sector.
The publication of its annual Activity Survey – summarising planned expenditure on the UK continental shelf (UKCS) by 75 leading oil and gas companies – reports that the cost of developing and producing domestic oil and gas in 2008 rose by an astonishing 12% from 2007. The most damning figure is that only one third of new exploration and production developments, now under consideration, are set to break even at current rates.
Oil & Gas UK’s Chief Executive, Malcolm Webb, said: “Our research shows that if investment could be sustained at around £5 billion per annum, the industry could hold production decline at 4% to 5% a year on average. However, if investment falls, that decline will again accelerate.”
The body, like several others, has called upon the Government to step in and help improve the availability of credit for, and ease the tax burden upon, both current and future developments. Lobbyists have already met with incumbent Energy Secretary Ed Miliband to discuss the issue.
As figures make grimmer reading the calls for tax breaks to prevent a collapse in drilling activity in the North Sea continue to grow.
A low tax rate for the oil industry would quickly allow smaller operators to benefit from losses incurred on previous North Sea investment.
The proposed changes are fundamentally modelled upon a system run in oil-rich Norway, which provides for favourable capital allowance for industry. This in turn entices higher levels of capital investment in exploration prospects.
The daily operating costs at the drill make grim reading. The cost of producing just one barrel of oil in the UK costs $13; $3 less than the capital investment required to create this end product.
Add exploration costs, funding costs and corporate overheads into the equation and the cost producing a barrel of oil in the UK soars to between $40-50. On top of this is tax rate for of between 50-75%. North Sea oil companies paid the Government a cumulative total of around £13 billion last year alone.
The government’s next move – or lack of one – may well decipher the future of British oil production in the North Sea.