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Oil supplement: Solid in the Granite City

Aberdeen is dependent on North Sea Oil

By Colette Cohen   February 2015

The North Sea has brought prosperity to Aberdeen—average wages are £12,000 higher than the rest of UK

When the oil price falls, it’s not just Aberdeen’s motorists who take note. As the centre of the United Kingdom’s oil and gas sector, the Granite City supports 30,000 oil and gas workers and 10 times that number in the service sector. The city has boomed as a result of the North Sea—average wages are £12,000 higher than the wider UK and unemployment is just 2 per cent.

Consequently, the fall in the oil price from a high of nearly $110 a barrel to less than $50 in the past six months has caused concern. When the price fell rapidly in the 1980s thousands of people lost their jobs, causing hardship and creating a skills gap for years to come. This time we should learn from the mistakes of the past and try to take a longer-term view. Centrica Energy has been exploring for and producing hydrocarbons in the UK for more than 30 years and invested over £1bn in the North Sea last year. We know the oil price can be volatile—in our time in the North Sea the price has been as high as $145 and as low as $10. But we believe there is still a good future.

First we must work hard to ensure that projects already in train keep moving forward. We are one of several operators investing in new developments, like the £1.6bn Cygnus gas project (due to produce gas later this year), which will be able to supply heat and power to over 1.5m homes.

Second, we must look at smart ways to adapt to the current oil price through dialogue with our suppliers and contractors, making our operations as efficient as they can be.

However, to safeguard the future of the North Sea, it is important to look beyond the fall in the oil price. The North Sea has been maturing for many years, at the same time becoming more challenging and expensive. Last year production fell to its lowest level since the 1970s and only 15 new exploration wells were drilled.

As we run up to the general election in May, Aberdeen will be looking to the next government to help address these challenges. The UK tax regime is one issue. Currently exploration and production companies can pay a tax rate of 81 per cent and in 2011 the government increased the rate by 12 per cent overnight, costing the sector billions of pounds. While the government recently reduced this rate by 2 per cent, we need a further reduction to ensure there is continued investment in these vital resources.

It is estimated that an additional 12-24bn barrels of oil could still be produced in the North Sea, enough to sustain Britain for decades to come.

We must also take forward the recommendations of Ian Wood’s landmark report of February 2014, which examined the future of the North Sea hydrocarbon industry. This estimated that an additional 12-24bn barrels of oil could still be produced in the North Sea, enough to sustain Britain for decades to come.

However, Wood said that this was conditional on some key changes. He outlined that different players in the industry must collaborate more closely, sharing information and resources and working together to produce more of the UK’s domestic oil and gas. He also recommended the creation of a new independent regulator—the Oil and Gas Authority—which the government has begun to create. It is vital that this is staffed by industry specialists and that the bill for the regulator is proportionate and spread between industry and government.

He also recognised the potential of the UK’s fledgling onshore oil and gas industry. The UK has some of the best shale resources in the world and, as the North Sea matures, we can use the expertise and talent in Aberdeen to drive the industry forwards. But to maximise this opportunity we need policymakers from all parties to get behind this new industry by creating a regulatory regime that is both efficient and high quality, and by maintaining a fiscal environment that supports investment.

In the 1960s many commentators wrote off the North Sea basin—one famous sceptic even offered to drink all of the oil that was produced. Now the industry supports 400,000 jobs and billions of pounds of investment each year. With the help of policymakers we can make the changes necessary to safeguard Aberdeen’s future and keep the Granite City rock-solid for years to come.

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