UK Oil Industry Under Serious Threat From Low Oil Prices

The plunge in oil prices is ruining the United Kingdom’s oil industry in the North Sea, according to a leading executive in oil exploration.

“It’s almost impossible to make money at these oil prices,” Robin Allan, the chairman of Brindex, the oil-exploration association, told the BBC in an interview broadcast on Dec. 18. “It’s a huge crisis.”

Allan, also a director of Premier Oil, said, “This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that’s painful for our staff, painful for companies and painful for the country.

"It’s close to collapse,” Allan said. “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.”

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Recent developments support Allan’s thesis. Several companies say they’ll spend less in the coming year because the low price of oil, which has declined by more than 40 percent since June, has cut deeply into their revenues.

One of many is the US oil giant ConocoPhillips, which announced on Dec. 8 that it would be cutting its capital budget for 2015 by 20 percent and postponing major investments in oil fields in North America. “We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” ConocoPhillips CEO Ryan Lance said Dec. 8. That environment includes a 16 percent drop in the value of the company’s shares since prices began falling in the summer.

Part of the ConocoPhillips cutback is the company’s decision to cut 230 out of 1,650 jobs in the UK. Other energy companies, British and foreign, doing energy work in the UK also are retrenching. They include the US oilfield-services provider Schlumberger, Scotland’s Wood Group and the US company Apache.

Oil and Gas UK, Britain’s energy trade association, said it couldn’t comment on any opinions or business decisions of its members, but it “recognizes that the falling oil price is affecting activity across the UK Continental Shelf, and companies are having to take hard decisions in light of this challenging business environment.”

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Despite such a gloomy outlook for Britain’s oil industry, there’s also evidence that other areas of the UK economy could benefit. In fact, British accountants at PricewaterhouseCoopers (PwC) say the drop in the price of oil “should be a net benefit to our economy as a whole, even if there [are] some losers in the UK oil and gas sector.”

PwC’s chief economist, John Hawksworth, said: “In essence, an oil price fall acts like a tax cut for the economy, but a particularly favorable one in the sense that the burden of lost revenue is primarily borne by the major oil producers such as the OPEC member countries and Russia.”

That also could mean trouble for Britain, which is also a major oil producer, Hawksworth said, but he stressed, “[W]e are now a net oil importer, so there should be a net benefit to our economy as a whole.”

By Andy Tully of Oilprice.com

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