Coming to terms with the low price of oil and gas

An offshore platform in the Southern North Sea.

An offshore platform in the Southern North Sea. - Credit: Archant

The collapse in the price of oil and gas has hit operators working off the East Anglian coast. Ross Bentley talks to industry leaders about what needs to be done and the prospects for recovery.

Two years, it would seem, is a long time in the oil and gas industries.

Back in mid-June 2014, oil was trading at around $115 a barrel and the price of natural gas was nudging 60p a Therm. Fast forward to the present day and the prices for both have collapsed. Brent crude is now around $40 a barrel having gone below $30 at the turn of the year while the price of gas has halved.

Oil prices have slumped due to an oversupply on the global market. Iran’s return as an international oil producer in January after sanctions were lifted has only exacerbated the problem.

Depressed oil prices have also driven natural gas prices down while increased global supplies of liquefied natural gas (LNG) and mild winters in Europe have caused them to plunge further.

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All of this is bad news for companies linked to the production of natural gas in the Southern North Sea (SNS) off the east coast, many of them based in Norfolk and Suffolk. Gas extraction has taken place off East Anglia for the past 50 years and there are around 150 platforms operating across the SNS - a third of these are connected to the gas processing terminal at Bacton in Norfolk.

According to Simon Gray, CEO at the East of England Energy Group (EEEGR), a trade body, over half of these gas platforms are currently running at a loss. The organisation calculates that between 2-3,000 jobs related to the oil and gas sector have already disappeared along the east coast.

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Research conducted by energy specialists Nautilus Associates found that 26 companies had filed for administration in the Lowestoft and Great Yarmouth area between April and October 2015 and more than 1,000 people were made redundant.

Companies still operating are asking staff to take unpaid leave or salary reductions. Vital investment to keep ageing platforms operational and to exploit new discoveries has been curtailed.

Peter Aldous MP, whose Waveney constituency takes in Lowestoft, says job losses are also happening in smaller firms along the supply chain who are seeing work drop off. In addition, national energy firms are consolidating and closing their regional offices in East Anglia.

“This all has a significant knock-on effect on the local economies in Lowestoft and Great Yarmouth, as there are less people spending in shops and going out in the evening,” he said.

It is against this backdrop that industry bodies have acted to support the oil and gas sector in East Anglia.

Last year the Local Enterprise Partnership for Norfolk and Suffolk set up an Oil and Gas Taskforce in response to these challenges and earlier this month it announced a package of measures aimed at supporting struggling businesses and employees. They include discounted consultancy advice for companies on how they can diversify and restructure, and retraining support for individuals.

The industry has also been lobbying government ministers to persuade them to reduce the tax burden on the oil and gas sector. They argue that a combination of falling commodity prices and the cost of maintaining ageing assets means they can no longer pay tax at the rate they have done in the past. There are hopes the Chancellor might make an announcement on this issue in tomorrow’s Budget.

“We are not a cash cow anymore,” said Mark Goodall, chairman of the Oil and Gas Taskforce.

“We are saying to government that there have been some great returns in the booming years but now is the time to realise that this is a super mature industry, and that the current level of taxation has to be reduced to help us maximise recovery of resources in the North Sea.”

There was a chance to get this message across at EEEGR’s Southern North Sea conference, held at the Norfolk Showground in Norwich in early March. The event was attended by Andy Samuel, chief executive of the Oil and Gas Authority, who met with industry representatives.

Regardless of any announcements on taxation, companies operating in the sector are going to have to become more streamlined to survive after almost a decade where high prices have masked some inefficiencies.

“We are not suddenly going to go back to $100 a barrel,” said Peter Aldous, “As we enter this Indian summer of activity in the North Sea we will see more collaboration and sharing of costs between companies.”

There is a general consensus that the natural gas sector must be supported because of its importance to the country as whole.

In November last year, the energy secretary, Amber Rudd, announced what she described as a “reset” of Britain’s energy policy, and stated that the UK will close all coal-fired power plants by 2025. She said the capacity gap will be filled with largely new gas and nuclear plants. Already natural gas is used to heat 70% of the nation’s homes and to generate around 48% of its electricity.

If Aberdeen, known as Oil City, is seen as responsible for keeping cars on the road, then the east coast, the country’s largest gas field, can be credited with keeping the nation warm and the lights on. And as decisions on new nuclear builds are delayed, the position of gas as a vital bridging fuel between coal and new nuclear becomes ever more crucial.

One of the big issues in the gas sector at the moment is decommissioning, a term for the removal of ageing assets, such as old gas platforms in the SNS.

Simon Gray at EEEGR says there are concerns that with a dip in the oil price, operators will seek to decommission platforms prematurely to keep themselves active and to generate jobs before all the hydrocarbons have been used up.

“If in ten years’ time the price returns, there will be resources stranded that we won’t be able to get back to again,” he said.

However, while it has undoubtedly been a tough time for the sector and the human cost has been high, it isn’t all doom and gloom. Industry –watchers point to the relatively diverse employment opportunities for those leaving the oil and gas sector in Norfolk and Suffolk. The Anglia region is strong in a number of areas from advanced manufacturing and life sciences to tourism and food and drink.

Another growth area is offshore wind. Currently the UK has more operational wind farms than the rest of the world combined and of the country’s installed capacity over 60% is off the East Anglian coast.

In the past month, ScottishPower Renewables have announced its final investment decision for East Anglia ONE – a 120 turbine windfarm due to be installed off the Suffolk coast. As well as creating up to 3,000 jobs during construction, at least 50% of the total £2.5 billion investment in the project is expected to be spent in the UK.

In addition, marine services firm James Fisher and Sons plc revealed that its £25m contract for the next two years servicing the construction of the Galloper Offshore wind farm off Suffolk would generate 100 new jobs, mostly in the Lowestoft area.

Industry expert Johnathan Reynolds from Nautilus said: “This news has extra poignancy and significance to the offshore supply chain, given the challenges and uncertainties in the oil & gas sector.

He added: “The real benefit of these developments is for the security of the UK’s power supply which will be felt in families and homes in the Lowestoft area and beyond, with skills training, jobs during the construction period of East Anglia ONE and Galloper, the rest of the East Anglia zone for years to come and then the long-term jobs for operations and maintenance of all the offshore wind farms off Lowestoft for decades to come.”

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