Scottish Agenda: North Sea oil still has a platform for success

What is the future for North Sea oil and gas?

Scotland’s North Sea oil and gas industry was, until fairly recently, seen as a rock. In the eyes of many — including Alex Salmond’s government, which recently renewed calls for an oil fund — it would remain immune to the credit crunch and could be relied upon to give impetus to our otherwise clapped-out economy.

Oilfield services companies, particularly those with a technological or managerial edge, were in vogue with banks and private equity houses; valuations and deal-making activity were holding up rather nicely.

Unfortunately the worst slump in global demand for oil since 1980, halving the oil price from $147.50 (£88.49) per barrel last July to $72, has put an end to the party.

Oil and gas drilling activity in the North Sea has slowed considerably, with a recent Deloitte report showing just 15 exploration and appraisal wells “spudded” between April and June, a 57% fall on the same period last year.

This is making life tougher than expected in Aberdeen’s oil and gas services sector, and there have been increasingly desperate calls for a more favourable tax regime.

Now the fallout is being felt. Last week, 36 people were laid off by Stable Holdings after the once rapidly expanding Aberdeen-based drill-bit provider failed to secure further working capital from Royal Bank of Scotland and went into administration.

Ten days ago, Houston-based multinational Schlumberger said 58 jobs at its Dyce-based oil and gas drilling and measurements division were at risk, while BP and Royal Dutch Shell recently confirmed plans for massive job cuts.

BP, under CEO Tony Hayward, wants to slash costs by $3bn this year and recently warned suppliers it would no longer tolerate overcharging. Hayward said: “We’ve not really begun to get costs in the supply chain back to where they need to be for a $60 world.”

The picture at Shell is no better. This year it intends to lay off up to 10% off its 102,000 global workers, including 8,500 staff in the UK. The majority will be white-collar staff.

And the former energy minister Malcolm Wicks, now the Westminster government’s special envoy on energy security, last week admitted it would be impossible for the decline in Britain’s oil and gas industry to be stemmed.

However, it is not all doom and gloom. The battle for Venture Production, which Centrica is seeking to acquire for £1.3bn, and the recent spate of acquisitions by Taqa Bratani, the UK arm of the Abu Dhabi National Energy Company, reveals some remain optimistic about the prospects for North Sea oil and gas.

Taqa, which on August 1 took the Brent oil and gas system from Shell, will be one to watch in the coming months. The French energy group GDF Suez has committed to opening a £6m exploration and production hub in Aberdeen, a move expected to create 80 jobs over the next 12 months.

After all, there are meant to be 25m barrels of oil left beneath the North Sea’s inky waves. Given that the International Energy Agency now predicts that “peak oil” will be reached a decade earlier than previously thought, it probably won’t be long before the oil price rises again.

Bank owes us an answer

Lloyds Banking Group, which last week revealed record-breaking writedowns of £13.4bn in the first half of the year, is not short of troubles. The vast majority of those losses stem from injudicious lending by Peter Cummings’ HBOS corporate division, whose poor judgement is likely to come under increasing media and regulatory scrutiny.

Paul Moore, HBOS’s former head of group regulatory risk, has added his voice to calls for a public inquiry into how the losses arose. In particular, the authorities ought to check out Bank of Scotland Corporate’s Reading branch, whose activities have recently been the subject of a Radio 4 documentary and a House of Commons debate. The branch lent at least £500m to companies where the bank had installed the “turnaround consultants” Quayside Corporate Services, yet many of the companies went bust and were unable to repay their loans.

The taxpayers who bailed out Lloyds HBOS and Lloyds last October have a right to know how this was allowed to happen.

The dead reunited

ITV has come in for a drubbing over its failure to make more of a go of the social networking website Friends Reunited, for which it paid £175m four years ago.

Last week, the broadcaster accepted defeat and sold the business to Dundee-based DC Thomson for just £25m. I suspect this will turn out to be an extremely good deal for the Dundonians.

Chris van der Kuyl, the games industry veteran who runs DC Thomson’s online arm Brightsolid, insists that Friends Reunited’s properties — which straddle social networking, online dating and genealogy — are not quite as jaded as they have been portrayed in some quarters.

Maybe reuniting people with their long-dead ancestors will turn out to be more lucrative than getting them together with their former school friends.

This Scottish Agenda business comment piece was published in Sunday Times Scotland on 9 August 2009