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The UK’s Oil And Gas Ultimatum: Exploration Or Bust

Here's something that most of you probably knew but didn't really want to see written in a report: the number of jobs in the UK's oil and gas sector has dropped more than 25 percent over the last two years. It brings into sharp relief the real and absolute need for hands to shake on a deal in Vienna on November 30.

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The information comes from the annual economic report from Oil and Gas UK. It estimates that after two years of severe cuts, 120,000 jobs no longer exist – made up from 84,000 jobs in 2015 and 40,000 this year. The hardest hit were onshore jobs, due to what it says is “depressed upstream activity in the current economic climate.”

It has noted that the “industry has experienced more turbulent industrial relations than has been the case for many years…at the time of writing there is industrial action taking place – the first offshore strike action for 25 years.” Underlining the impact on morale on and offshore, the report points a finger at the industry and urges it to “involve and engage with the people behind its success to help shape its future.”

It says the impact is now being felt on the supply chain, with average revenues falling 30 percent since 2014 – some sectors have experienced even greater declines. Spending across the UK Continental Shelf fell from $34.49 billion in 2014 to $28.14bn in 2015. It’s expected the 2016 sums will add up to around $24.64 billion.

With only half a dozen wells being sunk this year in the UK comes a warning of further deterioration in prospects if exploration does not increase. In 2014, £4.3bn was budgeted to open up five new fields; this year it is a measly £100 million for one field.

A positive note comes in the form of a realisation that what analysts had feared – large numbers of businesses failing – has not transpired, and is, it says, “a tribute to the companies that have responded to the downturn by differentiating their value offerings and diversifying both into new geographies and new products and services.”

As a result of efficiencies in the industry, the cost of extracting a barrel of oil has fallen 45 percent, to an estimated $16.

The bonus of what’s believed to be another year of increased production – up 5.7 percent since 2015 – which built on last year’s increase, the first in 15 years, is brought crashing down by this warning. The BBC reported that “For every barrel newly found, four are being extracted from existing fields.”

Oil and Gas UK is right – this is unsustainable. Its chief executive, Deirdre Michie, said, “The lack of new development projects must be urgently addressed if we are to avoid a repeat of the sharp production decline that dominated the early part of this decade. While costs have fallen significantly and the fiscal regime has been improved, many potential investors are unable to access the finance they require to develop assets.” As the BBC’s Business editor for Scotland, Douglas Fraser, put it, “Relying on offshore equipment which companies either use or lose due to cost and corrosion, it needs a steady flow of new funds to lengthen the lives of platforms and pipelines. In turn, that requires new reserves being found, and long-discovered but unexploited reserves being newly developed. Neither is happening on anything close to a sufficient scale for the industry’s return to health.”

Michie added that in addition to the decision to leave the EU, which added complexity “in an already testing environment”, the UK’s Continental shelf is in “urgent need of fresh investment to boost exploration and drive activity, particularly for the supply chain. Now it is time for the UK and Scottish Governments to reinforce their efforts to promote the UKCS, nationally and internationally, as an attractive investment with world leading capability from front end exploration to late life operations.”

If you’ve managed to stay with me till the end – there is light at the end of the tunnel. The mood music surrounding OPEC’s Vienna meeting and a deal to cut production is apparently positive. With OPEC secretary-general Mohammed Barkindo telling journalists at the recent Oil and Money conference that “We expect that all the building blocks will be in place. I am optimistic we will have a decision.”