Oil price downturn continues to impact jobs

Jobs supported by the UK’s offshore oil and gas industry, currently under the severe strain of continued low oil prices, will have fallen by the end of 2016 by an estimated 120,000 since their peak in 2014, according to the latest published data released on 10 June 2016 by industry trade body Oil & Gas UK. The analysis, carried out by marketing services company Experian, forecasts that in 2016 just over 330,000 jobs in the UK will be delivered through or supported by oil and gas production.

Brent crude is currently trading at around $50/b, less than half the price it was in 2014 when jobs linked to the sector peaked at over 450,000. Jobs supported fell by an estimated 84,000 to around 370,000 in 2015, and are forecast to have fallen a further 40,000 by the end of this year.

Deirdre Michie, Chief Executive of Oil & Gas UK, says: ‘We cannot underestimate the impact the global downturn in the industry is having on the UK economy, nor the personal toll for those who have lost their jobs, and the effect on their families and colleagues.’ She continues: ‘The industry has been spending more than it is earning since the oil price slump towards the end of 2014. This is not sustainable and companies have been faced with some very difficult decisions. To survive, the industry has had no choice but to improve its performance. It is looking to find efficiencies to restore competitiveness, to attract investment and stimulate activity in the North Sea. With up to 20bn barrels of oil and gas still to recover, this region is still very much open for business.’

‘Just over 330,000 jobs is still a significant number,’ adds Michie, ‘but the total employment we will sustainably provide depends on the level of investment attracted into the basin. If investment falls, then so will jobs. The interventions we make now will be critical to shape the industry’s direction and help stem future losses. Everyone in the sector can play a part. Effective workforce engagement is vital onshore and offshore, as is greater cooperation – within teams, within companies, across the industry and with the regulators and governments. Competitiveness is improving as a result of the work the sector is doing in this area – and is being reflected in the reduction in unit operating costs from almost $30/b in 2015 to around $17 this year. But to protect our industry and the skilled jobs it provides we need to see further efficiencies. The work of companies and of the industry’s Efficiency Task Force needs to focus on ensuring that the changes being put in place are sustainable for the future that we all need to work towards.’

It is also important we consider what we can do in the immediate term to stimulate activity in support of exploration and development of existing small pools opportunities to help support the supply chain as it goes through these challenging times.’

Industry potential and challenges

An anticipated reduction in unit operating costs this year to around $17/boe would represent a 42% fall in two years. On a positive note, the UKCS still holds up to 20bn boe and can continue to provide a secure supply of energy for the country, according to Oil & Gas UK. The sector will continue to generate billions of pounds in corporate and payroll taxes from the supply chain.

However, challenges remain. Over 20% of oil fields on the UKCS are operating at a higher unit cost than the prevailing oil price of around $50/b. Furthermore, the number of exploration and appraisal wells drilled in 2016 could be less than half the number drilled in 2015. In addition, less than £1bn of fresh capital is expected to be sanctioned in 2016 – one eighth of the average over the last five years – while the number of fields expected to cease production between 2015 and 2020 has risen by one fifth to over 100.

Innovate and integrate
Meanwhile, a study from the Bank of Scotland suggests that oil and gas businesses must integrate and innovate in order to survive. The report, entitled Re-evaluating strategies, found almost half (43%) of UK oil and gas firms are planning further cost cutting to help manage the impact of the sector’s industry downturn. Gathering views from across the industry, including its supply chain, the study reports that for every six jobs lost in 2015, only one new job was created.

However, despite the slump in oil prices, over a fifth (22%) of businesses are still looking at North Sea expansion opportunities. This is being entirely driven by smaller and mid-sized companies who find it much easier to diversify and embrace new technology. None of the larger firms surveyed have planned any North Sea growth.

Unsurprisingly, given that the oil price fall is global, there has been a cutback in international expansion intentions. While just over two thirds of firms (67%) are looking at international opportunities, this is down on 91% last year. It is largely driven by a considerable drop in interest in North America, traditionally the favourite area for UK firms where only 16% of firms are looking at investment opportunities compared to 31% last year and the Middle East, which is down from 27% to 19% year-on-year. West and North Africa are fast becoming hotspots for UK firms; with interest in these regions markedly up among small and mid-sized firms.

A quarter of the firms (25%) surveyed also reported that they had grown through the downturn through diversifying into new sectors and investing in new technology. It is hoped that this investment will create an industry that is much more efficient and resilient for the future.

Losing a skilled workforce
Of the 141 companies questioned, more than half (58%) have had to introduce efficiency measures or cut costs over the last 12 months. For just over half (51%) of all respondents, this has involved making redundancies. Firms in Scotland felt the brunt of the losses most severely with six in 10 (63%) businesses reducing their workforce. This compares to an average of 42% across firms surveyed in England and Wales.

These cuts also appear to be having a reputational impact, making the industry less attractive to potential talent. Two-fifths (41%) of respondents worry young people will not see the sector as a viable career option, creating a skills gap that is further exacerbated by the cyclical nature of the industry.

Re-evaluating strategies
Looking ahead to the next 12 months, just under half of companies (48%) expect to take efficiency measures to reduce operating costs and improve profitability, but firms are responding in entrepreneurial ways in order to tackle the challenges facing them. The five most popular strategies being implemented in order to meet the cost challenges in the North Sea are making day-to-day operational efficiencies (67%), rationalising supply chains (66%), adopting new technology (63%), followed by adopting new processes (60%) and product development (55%).

Four in 10 businesses began to diversify their operations (40%) last year, and this is set to continue in 2016. However, plans have changed since last year’s oil and gas report. Interest in onshore shale gas has dropped, with a third of companies (31%) giving it a high priority compared to half (47%) last year. While small firms have maintained their interest in renewables work (2015: 37%, 2016: 37%), mid-sized companies’ appetite in this areas has grown significantly, from 46% in 2015 to 57% in 2016.

Large, global operators (57%) also see decommissioning as a major diversification opportunity. This sentiment may be driven by the anticipated £17bn clean-up of redundant infrastructure over the next decade.

Source: Oil & Gas UK