North Sea guru warns recession may devastate the industry
Crisis is not a word that trips lightly off Sir Ian Wood’s tongue. But the 66-year-old Aberdonian oil baron is deeply concerned about what the next two to three years hold for the North Sea.
At the very least, he sees a danger of a combination of lower oil prices and a lack of access to funding causing investment in new oil and gas projects to plummet.
Wood says that these and other factors may halve new investment in capital projects on the UK continental shelf [the UK part of the North Sea] from approximately £5 billion in 2008 to £2.5 billion in 2010.
Wood warned that such a shortfall would have serious ramifications for the industry’s future. It would mean 50,000 job losses in the North Sea sector and cause vital infrastructure there — including pipework, platforms and hubs — to deteriorate or have to be decommissioned and removed.
The danger is that much of it would never be replaced, given that North Sea oil and gas reservoirs now being discovered average only 15m barrels, about one-tenth of the size of those found in the region’s 1970s heyday. They are also often in less accessible locations. Such a loss of infrastructure would severely curtail the future production capacity of the North Sea, said Wood.
Ian Wood’s company, Wood Group, started in the North Sea but has grown into a global force in the oilfield services business, with 28,000 staff in 46 countries.
Listed on the London Stock Exchange in 2002 and valued at £1.37 billion, it now gets 20% of its $5.2 billion (£3.5 billion) turnover from the North Sea.
A big problem for the industry is the oil price, falling from a peak of $147 a barrel in July 2008 to between $40 and $50 nowadays.
Alongside other factors, this has made new projects less economically viable. The depth of the global recession is also limiting the world’s thirst for oil and clouding the medium-term outlook for the sector.
Wood believes the time has come for the UK chancellor, Alistair Darling, to step in. He hopes the Edinburgh South West MP will introduce medium-term tax reductions and other tax regime amendments for companies operating in the region when he unveils his budget this Wednesday.
“The UK continental shelf has produced 37 billion barrels of oil equivalent (BOE) so far,” said Wood. “The guesstimate of what’s still to come varies between 16 billion and 25 billion BOE.”
Reduced taxes might prevent a drop in investment in new North Sea fields and the maintenance and enhancement of existing fields between now and 2011. If not, the “chances of getting the 25 billion barrels will be reduced, which means you will fall back towards maybe 16 billion barrels”, he said.
“That nine billion barrel difference, over the next 20 to 30 years, has serious implications for the UK’s security of energy supply and economy.”
It would also equate to a loss of more than $720 billion for the UK economy and exchequer, assuming an average oil price of $80 per barrel.
Wood added: “Our offshore oil and gas industry is by far the most heavily taxed industry in the UK.”
He said the average rate of tax paid on profits by operators in the North Sea is 58%. The additional corporation tax in the past four or five years, plus the fact that some fields are still taxed at 70% due to a mixture of corporation tax and special petroleum tax, is undermining the industry’s competitiveness, he added.
Last year, Wood Group made record pre-tax profits of $384m on turnover of $5.2 billion.
Alistair Birnie, chief executive of Subsea UK, an industry body, said: “I think there are signs that this government is realising that a short-termist approach to the oil and gas industry is no longer acceptable, and recent statements in the press would suggest that they will be making welcome announcements next week.”
This article was published in The Sunday Times on 19 April 2009