The costs of the crude price plunge must be shared fairly

As memories are still fresh of what that meant in terms of job losses and company failures the onus will be on oil and gas firms to try to ensure the fallout this time round is not as painful.

The outlook, however, appears to be very bleak.

The fall in the crude price from around $50 early this month has been driven by an unprecedented combination of factors in the form of the coronavirus and a price war between Russia and Saudi Arabia.

This followed a rift between the two countries about how production should be curbed to offset the impact of the virus on demand.

The spat brought an end to more than three years of cooperation between the two countries and others in a programme of curbs that was introduced after Brent last fell below $30/bbl early in 2016.

What happens to the crude price now will depend on how coronavirus impacts on demand and whether Saudi Arabia or Russia are prepared to back down.

The struggle could take a long time to resolve.

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Saudi Arabia needs oil to fetch a price that will allow the kingdom to balance its budget. However, it may decide to ramp up production sufficiently to offset the impact of the fall in prices on its income.

The kingdom wants to regain some of the market share it has lost to US shale producers. These benefited from the partial recovery in the crude price that followed the introduction of curbs in 2016.

Russia is also reckoned to be willing to live with a sustained drop in the crude price if that would force US shale producers out of business.

The geopolitical complications provide a reminder that the health of an industry that plays a key part in Scotland’s economy is dependent on outside forces that it can’t control.

However, big oil and gas companies will have choices to make about how they deal with another long period of low oil prices.

The way industry players responded to the fallout from the slump in the crude price from $115/bbl in summer 2014 to the low reached early in 2016 seemed brutal to some.

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The response included cost cutting moves that resulted in hefty jobs losses at oil and gas producers and pain across the supply chain.

Majors pursued retrenchment policies which have had a lasting impact on people across Scotland.

BP announced plans to shed around 900 North Sea jobs between summer 2014 and August 2017 and decided to sell off a raft of what it deemed non-core assets.

The scale of the retrenchment may have reflected the fact the crude price plunge compounded the problems BP already faced as a result of the disastrous spill on its Gulf of Mexico acreage in 2010.

Royal Dutch Shell shed hundreds of North Sea jobs too as it looked to cut operating costs and to achieve synergies following the £36bn takeover of BG in 2016. BG had a big presence in the North Sea.

The fallout from the cost-cutting drive spread to Glasgow in 2016 when Shell announced plans to close an accounts centre in the city where around 400 people worked.

Job cuts in the North Sea were accompanied by changes in rotas and contractor pay rates at some firms that left people who remained in work worse off.

The impact of the retrenchment process rippled through the supply chain.

Oil services firms that help companies develop and operate fields faced steep cuts in revenues prompting many to cut jobs and forcing some out of business.

The pain was felt by engineering firms across Scotland and by companies in sectors such as hotels and restaurants which relied on oil and gas related business.

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It is reckoned the number of jobs supported by the oil and gas industry in the UK fell by around 200,000 between 2014 to 2018, to 260,000.

The justification provided for North Sea downsizing moves was that they were a necessary response to the crude price fall and would put companies in a position to compete.

But some feel the pain resulting from the last crude price plunge was not fairly spread.

Workers who lost their jobs suffered an immediate and painful impact.

Small and medium sized enterprises would not have had the reserves that bigger fish could draw on to see them through tough times.

The latest results announcements by Shell and BP underline how much money oil and gas giants have been making in recent times.

While both recorded a drop in annual earnings in 2019, following a fall in oil and gas prices in the year, they made around $27 billion underlying profits between them.

In recent months both have highlighted how pleased they are with the performance of their slimmed down North Sea businesses. Much of their investment is concentrated on big fields West of Shetland, from which they produce high margin barrels.

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Both firms have made huge payouts to investors since 2014.

Shell increased its quarterly dividend in dollar terms in Q1 2014 and has maintained it since.

BP increased its annual dividend in dollar terms in 2015 and raised it again in 2018 and 2019.

The two giants have also launched multi-billion buyback programmes in recent years.

Many thousands of people may be investors in oil giants thanks to the fact they belong to pension schemes that hold the company’s shares.

However, it should not be taken as read that investors are the most important stakeholders in oil firms that hold licences to exploit natural resources that were built up over billions of years.

If majors try to maintain payouts to investors amid what could be another long downturn the fear must be that will mean they look to make big cuts in operating costs and in investment in new assets.

The implications could be grim for the North Sea, in which operating costs remain high by global standards even after the cuts made in recent years.

North Sea industry body Oil & Gas UK said yesterday the sector had been left in a ‘paper thin’ state following the recent crude price plunge. It wants urgent help for the sector from the Government.

Against that backdrop, the prospect of renewed retrenchment by oil and gas firms will be alarming for workers and businesses across the wider supply chain.

Last time round the downturn followed years of plenty. A long period of $100/bbl plus oil fuelled a boom in the North Sea which came crashing to an end as growth in global supplies ran well ahead of demand.

This time sections of the supply chain will enter any downturn in poor shape. The recovery from the last one has never gained much momentum.

It should also be remembered how much support oil and gas firms have got from the taxpayer in recent years. Calls from industry players for the UK Government to help firms cope with the last downturn were answered in the form of generous tax breaks.

These mean some firms have been paying little tax in spite of making hefty profits.

Shell received $140 million more from the UK Treasury than it paid in 2018 as a result of the reliefs provided for decommissioning spending.

The defences advanced by oil majors such as BP for their strategies include the claim that high levels of profitability will allow them to fund hefty investment in renewables to help tackle climate change.

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In advance of this month’s market mayhem oil firms were warned their social licences to operate were under serious threat amid concern about emissions associated with the production and use of hydrocarbons.

They should not reduce their renewables investment budgets in order to ensure they generate enough cash flow from operations to maintain payouts to investors despite a drop in income.

Listed majors may claim the fact their shares are traded publicly means they are unfairly singled out for attention.

However, others will come under scrutiny in coming months.

Lots of North Sea assets that majors decided to offload have been acquired by new players that won backing for ambitious expansion plans from international private equity firms.

It remains to be seen whether the companies will carry on with investment programmes it was hoped would provide a valuable spur to North Sea activity.

Some may take comfort from arguments that any downturn could create opportunities for firms that see potential in the North Sea to capitalise on moves by others to reduce their exposure to the area.

The Longboat Energy business founded by executives who grew Aberdeen’s Faroe Petroleum into a £640m business last week cited potential for an “increasing number of material and attractive opportunities” in the North Sea if the oil-price fall was sustained.

However, it could take months before bargain hunters can take control of any assets let alone do anything with them.