Sparks

What’s next for Britain’s oil capital

 By Nicholas Newman

The cutbacks in the North Sea oil and gas sector have come sooner and more severely than anyone expected. Nicholas Newman takes a look at the impact that the crash in oil prices is having on Aberdeen and its people, britain’s troubled oil capital…

(Cover photo by www.independent.co.uk)

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Last year, the UK’s oil and gas sector suffered a 30 percent drop in revenues, 43 percent of the North Sea fields operated at a loss and 65,000 jobs were lost. Likewise, investment in new projects took a hit, falling from an average of £8 billion ($10 billion) a year to just £1 billion (1.2 billion) last year, according to Oil and Gas UK, the industry trade body. The travails of the industry have also hit UK government revenues with North Sea oil tax revenues shrinking from around £11.3 billion ($14.7 billion) to an estimated £35 million ($45 million) in 2016. Nowhere is the collapse in oil prices felt more acutely than in Britain’s oil capital, Aberdeen.

Aberdeen is a city in economic and social crisis as producers including Shell, BP and Total and drillers and service companies such as Schlumberger and Subsea 7 slash their spending, impose pay cuts and announce redundancies. Official city statistics record the loss of 50,000 jobs, a 15 percent fall in the city’s pre-crash population of 234,924 and arrivals at the city’s airport down 17 percent year-on-year in January 2016. In an industry with a tradition of high spending the new market conditions and growing acceptance of the new reality is forcing industry-wide cost cutting; the effects are rippling through the social and economic fabric of the city.

Oil workers facing redundancy attend jobs fair

Impact on Aberdeen economy

The retreat of oil money has hit Aberdeen’s property market hard. Property websiteHometrack records a 3 percent fall in average house prices to £188,000 ($244,000) in the year to March 2016. Aberdeen was the only city to see a fall in property prices and the rental market has been disproportionately hit. According to property website Help4letting.com, average rents in the city have fallen 15.9 percent over the past year and are expected to fall further as the slump continues.

The number of oil-related business visitors who kept the city’s hotels fully occupied and room prices high has declined. Hotel occupancy rates have crashed to just 46.5 percent and revenue per available room has fallen to a new low of £32.89 ($42.62), according to the latest LJ Forecaster Scottish Intercity Report. As a result of the decline in corporate clients it is now much cheaper to stay at some of Aberdeen’s most expensive hotels. This greater affordability has encouraged more tourists to show an interest in staying in the city.

Consumption has also suffered in Aberdeen. Owners of local pubs, restaurants and shops state that business is slow. At the bottom end of the market, the local Pound Shop, which traditionally sells everything on its shelves for under a £1 ($1.3), has closed. In the harbor, century-old pubs like the Crown & Anchor and East Neuk Bar have closed. According to restaurant owner Silver Darling, business is down 25% at his upscale eatery, Didier Dejean.

Amongst the businesses that were set up to meet the needs of oil workers and oil executives , the only services that are doing well are the pawnbrokers. It is not uncommon to see oil workers and executives pawning high value items such as Ferraris, Porsches and luxury watches. As pawnbroker Neil Mitchinson explains, “Reasons for coming to a pawnbroker are varied. For some it is to pay utility bills and for others it is to pay the taxman.” In the current climate, despite historically low interest borrowing rates from banks, many still prefer to pawn their valuables for a loan even though a broker typically charges interest of between 5-12 percent a month.

Credit: www.visitscotland.com

Life after redundancy

For some redundant oil workers the food bank has become a life-saver since “these are people who earned fairly significant incomes and have suddenly found themselves out of work” says Dave Simmers, Chief Executive of Community Food Initiatives North East. The scale of dependence is seen in a trebling of the number of food parcels given out in the last three years to families in need. One food bank has given out more than 10,000 food parcels a month, reports Charity Somebody Cares Aberdeen.

For the redundant oil worker aged over fifty the most common reaction is to take early retirement since many never expect to find another job in the industry again. This loss of talent and experience is unfortunate in an industry which will face recruitment difficulties when prices recover. For those still working, many are in poorer paying jobs. In Aberdeen, you can meet former North Sea oil workers in a whole range of different jobs, in supermarkets, offices, vans and trucks. “Others have gone elsewhere like London or Oxford, to retrain by obtaining a law degree or even a Masters so that they can set up their own business, “says Professor Victor Newman, Industrial Fellow at the University of Greenwich Business School. In addition, as management consultant Paul Lindop of i4el.co.uk notes,”you see former oil executives lending their expertise to help local businesses such as technology companies to develop their core business skills in leadership, change, start-up, turnaround and growth.”

There are still jobs for the sufficiently expert and experienced oil worker but the pay and benefits have been squeezed by the worldwide over-supply of workers competing for the diminishing pool of available jobs. One thing is certain, until oil prices recover, finding a job in this sector will be difficult.

 

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Future prospects

The cutbacks in the North Sea oil and gas sector have come sooner and more severely than anyone expected. The industry will continue, albeit smaller in size. To help the adjustment, the city and adjacent area has received around £504 million of extra government funding to supplement existing aid plans to diversify the economy away from oil into life science and tourism. A combination of new tax breaks for business start-ups, improvements in transport networks and training opportunities have been created to cushion the crash in this oil-dependent economy

Education and research will continue to adapt to the new conditions. Aberdeen’s Robert Gordon University is not only an important hub of research and education for engineering for the oil and gas industry but also a leading center for renewables. It offers a range of postgraduate energy degrees and it claims to have one of the highest graduate employment rates in the country. It offers hope for local oil workers wanting to retrain. In addition, the region is continuing to develop its expertise in renewables, in particular in offshore wind, with the eleven turbines European Offshore Wind Deployment Centre in Aberdeen Bay and wave power off Orkney.

Nevertheless, insiders expect some sort of revival of the UK’s oil and gas sector, even though in the long term the industry is in decline. This is the view of industry expert, Sir Ian Woodwho has stated that “the oil and gas industry could recover in 5 years but not to anywhere near the strength of before.” With many more billion barrels of oil left to extract, fields that are no longer economic for the oil majors are nevertheless attractive to specialist end-of-life companies. Improvements in technological capability may also open up new fields. A case in point is Britain’s Atlantic Margin, to the west of Shetland where new oil and gasfields(Laggan-Tormore, Edradour and Glenlivet) are being developed, utilizing remotely controlled subsea wells in waters too deep for surface rigs. “Though, one thing is clear, the industry is now more price conscious about projects than they were a year or two ago, when the emphasis was getting things done quickly, irrespective of the cost,” says an industry insider.

Laggan Tormore: A pioneering project

Another opportunity for the talents of Aberdeen oil workers lies in decommissioning of the many old oil and gas fields in North Sea waters. Decommissioning costs are expected to reach around £50 billion ($65 billion) over the next 25 years as companies are legally required to remove the millions of tons of steel buried in subsea pipelines or parts of production rigs. Decommissioning, is on the threshold of “take-off” since, according to Douglas Westwood, a specialist on the worldwide energy industry, around 146 or a quarter of the North Sea’s oil platforms could be scrapped between 2019-2026.

This is supported by a Wood Mackenzie report which anticipates 150 UK field closures by 2020 even if the price of oil returns to (£65) $85 a barrel. The need for decommissioning offers new options for oil workers and engineers. Early experience of decommissioning the Brent field also presents an opportunity for the UK to become an entrepot for specialist decommissioning services. Being a major logistics base for the global energy business will continue to help the city. Its port remains a base for supporting oil and gas operations worldwide, including those in West Africa, Norway, Australia and the Falkland Islands.

Credit: www.clydecruises.com

Steve Harris, the Chief Executive of Visit Aberdeen detects an opportunity for tourism from the oil fallout. He acknowledges that it used to be “really hard for people to afford to come and get a hotel room in the city, but that’s not the case anymore.”And the attraction? Aberdeen is the best spot in Europe for dolphin watching. All in all, Bob Ruddiman, a lawyer in Pinsent and Masons Aberdeen office, says the North Sea crisis could prove to be the extra push needed to change the sector for the better. For Aberdeen, although current prospects look poor, its long term outlook presents a wealth of opportunities.

about the author
Nicholas Newman
Freelance energy journalist and copywriter who regularly writes for AFRELEC, Economist, Energy World, EER, Petroleum Review, PGJ, E&P, Oil Review Africa, Oil Review Middle East. Shale Gas Guide. https://nicholasnewman.contently.com/