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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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British Oil Industry On The Verge Of “Collapse”

British Oil Industry On The Verge Of “Collapse”

The United Kingdom’s oil industry is taking a beating from low oil prices, so much so that it is “close to collapse.”

That comes from the head of the Association of UK Independent Oil and Gas Exploration Companies, otherwise known as Brindex. Robin Allan, the chairman of Brindex, says that the number of new oil projects that are profitable at $60 per barrel is close to zero.

“It's almost impossible to make money at these oil prices,” Allan told the BBC in an interview. “It's a huge crisis.”

The United Kingdom has been a significant oil producer in the past, driven mostly by offshore oil platforms in the North Sea. However, North Sea output has been in decline since the late 1990’s, with the industry unable to log substantial new discoveries to offset declining production from aging fields. Production has fallen by 40 percent in just the last four years. U.K. oil production, now below 1 million barrels per day, is less than half of what it was in 1998.

Related: Low Oil Prices Could Point To A More Serious Problem

Oil Production In The U.K.

With the best days for British oil fields behind them, costs have climbed rapidly. A strong currency, high taxes, and falling output have led to surging costs to produce each given barrel of oil. By some estimates, it is five times more costly to produce oil in the U.K. today compared to 2002. As a result, the health of the British oil industry has deteriorated rather rapidly.

But the latest crisis has been sparked by low oil prices, which have fallen by half since June 2014. That has oil companies slashing both spending and employees across the country. The U.K. oil and gas industry employs an estimated 450,000 people, but those numbers are starting to dwindle quickly. According to the BBC, ConocoPhillips is cutting about 14 percent of its 1,650 workers, and several other firms are either freezing wages or laying off workers. But the numbers are surely worse than is being reported because oil companies often use contractors, whose layoffs wouldn’t be officially announced.

Allan, of Brindex, says the British oil and gas industry is facing a grim future due to low international oil prices. “It’s close to collapse. In terms of new investments - there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone,” he said.

The job losses have prompted the industry, along with workers and unions, to call on the government to cut taxes to stem further casualties. The British government recently cut taxes by 2 percent, a reduction that the industry feels is a pittance.

Related: Oil Price Scenarios For 2015 And 2016

But a prominent voice on Britain’s oil industry dismissed the dire warnings. Sir Ian Wood, who was commissioned by the government to review the industry, says that predictions of a collapse of British oil and gas are “well over the top and far too dramatic.” And while there will be job losses, Wood estimated that they will be relatively small, perhaps in the range of 5 to 10 percent.

Much of Britain’s oil workers are located in Aberdeen, Scotland, which could see hard times ahead. “There is barely an oil company in Aberdeen that isn’t looking at reducing its headcount at the moment,” said Mike Tholen, an economics director with Oil & Gas UK.

Earlier this year, Scottish nationalists pushed for independence, a bid that was largely based on faith in a turnaround in the oil industry. But Scottish citizens rebuffed the independence campaign in September. If the British oil and gas industry is indeed facing an existential crisis, it probably works to Scotland’s favor that it will stay within the British union rather than having tried to build an independent state on a dying industry.

For now, there is little hope in the short-term. The British government can tweak tax rates, but as with all other producers around the world, the industry’s fate is tied to the global price of oil.

By Nick Cunningham of Oilprice.com

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