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Chris Smith

Chris Smith

Chris Smith is a Glasgow based writer and blogger. He writes extensively about finance on his website, Spend It Like Beckham. His articles about modern…

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Can Scotland Save Its Oil Industry?

The Scottish city of Aberdeen is built upon the successes of the oil and gas industry. A walk round the city centre reveals the level of investment, with every street festooned with luxury hotels, classy restaurants, and even a golf course, courtesy of Donald Trump.

Recently, however, there has been an increasing sense of uncertainty in ‘the granite city’. At the start of the year, it was reported that the price of crude had slumped to a twelve-year low with the likes of Shell warning of a 50 percent cut in profits. Across the city, oil workers have been facing redundancy from a variety of companies including Petrofac, Gulfmark, ConocoPhillips and Sparrows.

There are a number of widely reported factors that have contributed to the global drop in the price of crude oil including China’s continued struggle with its economy, continued unrest within the oil producing Middle East, U.S. oil producers adopting fracking techniques in an effort to gain a degree of self-sufficiency, as well as Saudi Arabia’s reluctance to reduce its levels of oil production. This last factor may be resolved, however ahead of April’s meeting of oil producers in Doha. Either way, the Aberdeen economy has faced the consequences, with reports of the amount of people claiming out-of-work benefits rising by as much as 72 percent. Related: Oil Prices Struggle To Move Beyond $40

With Aberdeen beginning to look like a less tenable location for oil and gas production, many industry leaders are starting exploring other markets, such as North Africa. James Crawford, MD of Wood Group PSN has specifically called out Mozambique, Kenya, and Tanzania as ‘fantastic opportunities’ over the Scottish Northeast for oil production.

Naturally, the Scottish Government is scrambling to do what it can to quell the diversion of investment into Aberdeen. During the 2014 campaign for independence, North Sea oil and gas was identified by the Scottish National Party as a potential cornerstone in the economy of an independent Scotland. Now that the SNP hold a controlling majority within the Scottish parliament, the politicians are keen to salvage Aberdeen’s oil and gas, especially as the party is drawing up plans to hold a second referendum on independence in the near future. The future of Scotland’s oil industry will, once again, be a key factor in this debate.

The road ahead for Aberdeen perhaps isn’t quite as bleak as is suggested in the media, however. Scottish Banks are still keen to offer investment to small businesses within the offshore sector. Other companies have sought to take advantage of the unrest in the Northeast, with the likes of Cluff Natural Resources looking to buy stakes in three North Sea licenses for the paltry sum of £3. Despite the turmoil experienced by the big names like Shell, it’s clear that there is a right-place-at-the-right-time attitude in the Northeast. Related: Russia Under Threat From U.S. Natural Gas

Although the physical extraction of oil and gas from the North Sea oil fields is at risk, there is still talent and expertise in Scotland that has the potential to grow. Take Rubberatkins, for example. This Aberdeen-based company is an industry leader through its innovative use of rubber sealing solutions. Whether their sealant products are being used a few miles away from their head office in the North Sea, or the deserts of Saudi Arabia, there is still plenty of opportunity for this small business to grow. All they have to do is respond to where the market is most geographically viable.

Having innovative companies within the industry is one thing, but if Scotland and the UK are wanting to remain a significant force in terms of global oil and gas production, perhaps a view that is blinkered towards the North Sea isn’t the most effective one. Shale gas explorers such as Cuadrilla, Coastal Oil and Gas, and IGas have been looking to follow the U.S. model and use fracking techniques within the UK. There has been some loud opposition from environmental groups towards this, but a number of viable sites have been identified across the UK. Related: The Current Oil Price Rally Is Reaching Its Limits

Another approach has been geared towards onshore drilling. In June 2015, UK Oil and Gas estimated that there were 271 million barrels of oil per square mile under The Weald, an area close to Gatwick, South of London. As recently as Monday, it was reported that a vertical well nick-named the Gatwick Gusher was achieving North Sea levels of oil flow, which appears to be promising when it comes to sustaining oil production in the UK.

So what can we take away from these changes that are developing within the UK oil and gas industry? First, investment is leaving Aberdeen and the Northeast of Scotland. Many of the multinational drilling companies that work out of Aberdeen are seeking to relocate in markets that offer more opportunity.

Second, the smaller, supportive businesses still have a market to work with, in terms of seeking business from a greater diversity of sources. And finally, if the UK as a whole wants to retain its place at the top table of oil producing nations, it has to look beyond the North Sea for its gas and oil supplies.

By Chris Smith for Oilprice.com

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