Big Oil In Big Trouble

     Britain's offshore oil industry has according to a new report, seen the loss of 15% of its workforce since the beginning of last year. To put that in perspective we are talking about  65,000 jobs gone within a year.

     The annual economic impact report published by Oil and Gas UK. Has shown a drop from roughly 440,000 to just 375,000 jobs created directly and indirectly by the oil industry. The report cited a vast reduction in both expansion and existing infrastructure as the main cause of job losses.

This year alone these cuts amounted to a massive £800m. This figure represents an 8% reduction in operating budgets with a further 14%, or roughly £1.3bn, cut planned for next year.

     The report went on to say that cost-cutting is expected to account for most of the losses to come. As a reaction to vastly reduced oil prices many companies have rushed to downsize and many have also begun actively decommissioning platforms.

     The report also mentioned that it was highly likely that capacity may have to be reduced even further in order for companies to weather the storm. Even after the oil markets begin to recover it is expected that the current push for increased efficiency will mean that job numbers will fail to return to their previous levels. In fact it is expected that over the next three years job numbers will continue to fall albeit at a slower rate.

     All of this comes on the back of a loss in revenue of 20% last year, and another fall of 30% this year. Offshore oil and gas companies have previously used the Offshore Europe event in Aberdeen to showcase increased growth and job potential. This year however has seen hard times in Aberdeen with the loss of jobs in the oil industry having a noticeable follow on effect in the Granite City.

     There is still money to be made from the industry, and Aberdeen is still toiling along.  In the UK oil industry though, insiders have said that there are quite a few companies that are "simply waiting to be bought". There's nowhere else to go and many otherwise highly intelligent and well educated professional may be left high and dry.

     Every week brings more redundancies and more pressure for those displaced by the downturn to find other opportunities. Last week it was Expro. This week it seems it may well be ConocoPhillips.

With the oil price falling from $115 (£75) last summer to below $43 (£28) last week, the North Sea industry, an experienced and solid sector, has now found itself facing the challenges common to older fields, with higher costs and declining production making the situation more complicated than in newer areas of development. Due to this there has been  a strong push to reduce costs further.

     The end result of these efficiency efforts is an aim to reduce the operational cost of extracting a barrel of oil, or its gas equivalent, from £17.80 to about £15. The industry hopes to achieve this result by the end of next year. So far, even with the cost cutting and job losses that price has only fallen to around £17 per barrel.

     Capital expenditure, which reached a peak last year of £14.8bn, is expected to fall to £11bn this year. Much of that will be taken from large scale operations that have already begun.  In the next three years it is expected to fall by between £2bn and £4bn more, effectively halving the total input within four years.

     Deirdre Michie, chief executive of Oil and Gas UK, was quoted as saying "This great industry of ours is facing very challenging times. Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices. This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints."

"Difficult decisions have had to be made across the industry. It is likely that capacity may have to be reduced still further in order for the business to weather the downturn.

     "The industry is under a lot of pressure and it is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices".

     Ms Michie also stated that the continuation of low oil prices will inevitably force companies to reconsider the viability of their offshore assets, and that there was a need for further "lightening" of the tax regime, to attempt to encourage further investment in the sector.