The Herald on Sunday

Brexit casts pall of gloom over new oil discovery in North Sea

DESPITE LAST WEEK’S MASSIVE OIL FIND OFF SHETLAND, RESEARCHER­S WARN THAT THE INDUSTRY FACES SIGNIFICAN­T CHALLENGES. SPECIAL REPORT BY JUDITH DUFFY

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THE oil and gas industry could be hit with a £200 million-a-year “Brexit bill” if a trade deal with the European Union is not reached, experts have predicted. The warning comes as Scotland’s oil industry received a major boost last week with the announceme­nt of what has been described as the largest undevelope­d discovery on the UK continenta­l shelf, which is principall­y the North Sea. Hurricane Energy announced one billion barrels of recoverabl­e oil could be in the oil field west of Shetland.

Researcher­s at Robert Gordon University in Aberdeen have examined the impact on the industry of the UK leaving the EU. The concerns highlighte­d include the possibilit­y of increased tariffs on exports of oil and gas services, adding significan­t costs to companies which operate globally.

The issue of free movement in the labour market and how this will affect the ability to recruit internatio­nal workers with specialist skills and capabiliti­es is also raised as a concern.

Professor Paul de Leeuw, director of the Oil and Gas Institute at Robert Gordon University, said some of the impacts of Brexit would be “relatively modest” as the industry was internatio­nal and used to a rapidly changing environmen­t. But he added: “There are impacts particular­ly around exporting goods and services to the world.

“The North Sea, especially Aberdeen and the Aberdeen area, is a great source of exports to the rest of the world, particular­ly in oil and gas services. That will be affected because unless we have deals in place, we will be potentiall­y exposed to additional tariffs.”

Leeuw said if World Trade Organisati­on rules were in place there was potential for additional tariffs of up to £200m a year on the industry, although he added this was “relatively modest” in proportion to the £14 billion of export potential.

But he said: “The other thing we see as being a challenge is that this is a truly internatio­nal and transnatio­nal industry – we do rely on the best capabiliti­es, the best skills, whatever country they come from. The movement of key resources, whether it be operationa­l resources, management resources or specific technical skills, are going to be critical for the success of the industry.”

Here we look at what the new oil discovery in North Sea means and whether the oil industry has turned a corner after years of struggle.

NEW DISCOVERY

THE discovery by Hurricane in the Greater Lancaster area site, around 60 miles west of Shetland, comes after more than a decade of exploratio­n in the area. The company announced it had found oil in two wells about 19 miles apart, which it said proved the presence of a giant field. It hopes to begin production in 2019. However, it is not the only significan­t discovery the firm has made in the area – another field called Whirlwind is estimated to hold around 205 million barrels of oil, worth around £2bn at today’s price of $50 a barrel.

Leeuw welcomed the news, but said it was early days in terms of how much oil could potentiall­y be extracted and whether it could bring a jobs boost to the oil industry. He said: “This is exploratio­n – they have found the field, but that doesn’t indicate yet how well the field will produce and how it will develop.

“This is a particular type of reservoir: it is really brittle rock and all the

There is a lot more interest west of Shetland and quite a number of new operators who are going to go west of Shetland. It is good news STATE OF THE NATION PAGE 30

oil sits in little cracks. The main thing which needs to be done is to test the reservoir and see how well it flows. That is what the company is going to do next and plans to get some early production. It is a very welcome developmen­t in the North Sea, but the main thing is how well it will flow – that needs to be tested in the years to come. I am cautiously excited.”

Alastair Cooper, chair of the developmen­t committee at Shetland Islands Council, said it seemed significan­t. But he too said it was too early to assess exactly the benefits. “There is a lot more interest west of Shetland and quite a number of new operators who are going to go west of Shetland. It is good news.”

THE FUTURE

THE UK oil industry has been rocked by a global drop in oil prices in recent years. Between 2011 and mid-2014 a barrel of oil fetched as much as $120, but that dropped to as low as $30 a barrel in February 2016. Around 100,000 jobs were lost in the industry between 2013 and 2016. However, there are signs the sector may have turned a corner. The latest outlook report from industry associatio­n Oil & Gas UK notes that the price is forecast to be around $50 to $60 a barrel in 2017, up 26 per cent on the previous year. Around 360 million barrels were discovered in 2016, more than in any other year since 2008.

Professor Alex Kemp, director of the Aberdeen Centre for Research in Energy Economics and Finance at Aberdeen University, also pointed to the recent awarding of licences for exploratio­n and production in new and under-explored areas of the North Sea as providing encouragin­g signs.

He said the fact large companies such as Shell, Esso, BP and Statoil had taken the licences pointed to hopes there was the potential for major finds.

“Shell and Esso are not going to go looking for five or 10 million barrel fields, that is too small to make an impact on their profit,” he said. “They will be looking for bigger ones.”

Kemp recently produced a report which forecast 11 billion barrels of oil can be extracted from the UK continenta­l shelf between now and 2050, based on models which predict prices will stay “lower for longer”. But he said further research, yet to be published, showed this could significan­tly increase if higher oil prices fuelled a drive towards more production. “We are finding that makes a big difference and instead of 11 billion barrels of oil equivalent by 2050, we are thinking you could get another five billion or so,” he said. “That needs the oil price to come up a fair bit to around $70 or $80 [a barrel].”

In the 1970s, Department of Energy economists forecast total reserves of between 8.5 and 14 billion barrels on the UK continenta­l shelf. To date, around 43 billion barrels of oil and gas have been recovered. Oil & Gas UK has forecast there are up to 20 billion barrels more to be extracted.

OIL REVENUES

THE North Sea energy sector and its benefits to the economy have come under much scrutiny and debate since the independen­ce referendum in 2014. The latest forecast, published in March, predicted the UK Treasury will receive £4.6bn from oil and gas revenue between 2017-18 and 2021-22, a drop on the £7.3bn predicted last November.

Longer-term figures illustrate how difficult it is to look into the future. Statistics from the Office for Budget Responsibi­lity, produced in 2015, estimated revenues between 2020-21 and 2040-41 could be as low as minus £5bn, if oil prices remain low and there is little production. However, it also forecast this figure could be £33bn if there are high prices and production. The central projection figure – considered the most likely estimate – is £2.1bn.

Oil & Gas UK recently said confidence in the sector is slowly returning, but urged the Treasury to extend tax breaks known as investment allowances to support activity in the North Sea.

However, Gordon MacIntyre-Kemp, founder and director of pro-independen­ce group Business for Scotland, argued that “decades of economic mis- management” have resulted in oil revenues in the UK dropping far more than any other oil-producing nation, over and above the impact of lower oil prices.

He said oil companies were being given massive tax breaks while still paying billions in dividends to shareholde­rs. “We also note that this is part of a national trend on UK taxation that large corporates are being allowed to find ways of paying less tax and that is a major contributo­r to austerity,” he said. “We need to review taxation as a whole and if there is a case for lowering the di- rect taxation of a big corporate then it must be linked to benefits to the economy and wider society.”

Environmen­tal campaigner­s have also warned opening up new oil and gas exploratio­n is “not something we should be breaking out the champagne about”. Lang Banks, director of WWF Scotland, said: “Clean onshore wind and solar firms are getting the rug pulled out from under them while the polluting oil and gas industry receive even bigger tax breaks to help them drill every last drop from under the North Sea.”

 ?? Main photograph: PA ?? North Sea oil received a boost with news of an undevelope­d oil find off the west of Shetland
Main photograph: PA North Sea oil received a boost with news of an undevelope­d oil find off the west of Shetland
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