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Tax Cuts Insufficient To Halt North Sea Job Losses

The British government’s offer of “bold and immediate measures” for the North Sea energy industry evidently wasn’t enough for some companies groping for ways to cut costs because of the plunge in oil prices and reduced oil and gas reserves in the region.

George Osborne, Britain’s Chancellor of the Exchequer, says the country’s 2015 budget will cut tax revenue from North Sea oil from 50 percent to 30 percent to help stave off job cuts. Yet Royal Dutch Shell, the UK’s largest oil company, announced March 26 that it will eliminate 250 staff and contract workers this year to cut costs despite the incentive.

Evidently Shell didn’t jump to this decision, according to Paul Goodfellow, the company’s vice president for exploration and drilling for Britain and Ireland. “The North Sea has been a challenging operating environment for some time,” he said.

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Goodfellow welcomed Osborne’s tax incentives as “a step in the right direction,” but said they were no substitute for the companies’ duty to redouble its efforts to tackle costs and improve profitability if the North Sea is to continue to attract investment.”

Also Taqa, the oil company based in Abu Dhabi, said it would reduce its 550-member North Sea work force by about 100, most of them contractors and consultants. And it cautioned that “the process will take a number of weeks and involve consultation with our work force. Our work force are fully informed on the proposed changes and we will work to support and guide them through the process.”

This isn’t the first round of job losses in the North Sea.

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On Jan. 20, Talisman Sinopec said it would lay off 300 North Sea workers, an announcement followed a week later by BP, which said it would cut 300 jobs, nearly one-tenth of its work force.

None of this can be good news for Aberdeen, the focus of Britain’s oil industry, nor for Osborne, who promised a daring budget that he said should be equal to the task of countering an economic threat to the North Sea energy industry.

No matter how bold Osborne’s response, though, the challenge evidently was too great no matter what the response. The average price of crude oil has plummeted by more than 60 percent from about $115 per barrel in late June 2014. The price has stabilized somewhat lately, to just over $50 per barrel.

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Shell cited a warning by Oil & Gas UK, the trade association for Britain’s offshore oil industry, that because of high production costs, one-fifth of the oil reserves remaining in the region can’t be extracted at a profit if the price of crude doesn’t climb above that $50 level.

“Current market conditions make it even more important that we ensure our business is competitive,” Shell’s Goodfellow said. “Changes are vital if it is to be sustainable. They will be implemented without compromising our commitment to the safety of our people and the integrity of our assets.”

Shell said that it informed staff and contractors about the layoffs and other cost-cutting measures on March 26, and will soon enter a period of consultation on further economies, including adjustments in the patterns of its work shifts.

By Andy Tully of Oilprice.com

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