the times | Thursday February 27 2014
3
Power of Scotland
Peter Jones
Time for politeness is over: now the industry demands certainty
F
or years, if you asked oil companies what they thought about Scottish independence, you were either told “no comment, we don’t do politics”, or “we operate in x countries, we’ll operate in x plus 1 if we have to”. There’s sense in that. Tough business folk who go out to play in the political sandpit discover that politicians play a lot dirtier and rougher than they do. Being seen to take sides can lead to a lot more than sand being kicked in the eyes. But being aloof also gives the impression that oil companies are above politics and not affected by what’s said and done at these low levels. People, and that includes politicians, have the idea that if firms get hit, say with sudden tax rises, they might complain, but they’ll just have to get on with it because nobody is listening to their gripes. Now the polite stonewall has crumbled. Bob Dudley, chief executive of BP, was first to break through it. Independence, he said, presented quite big uncertainties, about the currency and connections to Europe. BP would carry investing in the North Sea, but it was a question mark, he said, adding that his personal view was that Great Britain is great and ought to stay together.
Then came Colin Welsh, chief executive of Simmons & Company International, corporate finance specialists for the energy sector, who comments on the facing page. He said: “I wholeheartedly endorse what Bob Dudley said yesterday regarding the uncertainty that the question of independence brings to our industry and the threat that this poses to our economic future.” The word “threat” made this a pretty strong challenge to the Scottish government, who responded with the claim that £100 billion is going to be invested in the North Sea. Their message is pretty clear. There’s nothing to worry about, the oil and tax revenues will keep on flowing, with the between-the-lines subtext — shut up Mr Welsh. Except that Mr Welsh, who ought to know about investment flows in the oil business worries that it is misleading, maybe even dangerously so for the health of the North Sea and all the jobs that depend on it. “Where is this £100 billion? Who is going to spend it?” he asks. The number comes from Oil & Gas UK, the offshore industry’s trade body, whose 2013 activity report says: “Companies have just under £100 billion of capital investment in their plans.
“Of this £44 billion are already approved and under development and another £30 billion have a better then 50 per cent chance of approval over the next few years.” Translation: only £44 billion of capital spending is guaranteed, and the prospect of the remaining £56 billion being spent is chancy. Just this month, developments worth about £10 billion — Chevron’s Rosebank and Statoil’s Bressay fields — have been put on hold for up to a year because the profit-making potential looks to have deteriorated. And even if £100 billion was invested, it may not equate to increased production. Between 2008-12, according to Oil & Gas UK, some £39 billion was spent on capital investment and yet oil liquids production from the North Sea fell from 1.57 million barrels of oil per day (bpd) to 860,000 bpd, a 45 per cent decline. Comparing that with the US, Ernst & Young reckon that £772 billion was spent on exploration and production between 2008-12, much on the fracking boom, and liquid oil production increased from 6.97 million bpd to 10.32 million bpd, a 48 per cent increase. The lesson is pretty obvious. If you are
The problem of where to invest is increasingly troubling the oil majors
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an investor interested in putting a few billions into oil and gas production, the North Sea, where there are no big fields to be discovered, is not the most exciting place in the world to place it. The problem of where to invest is increasingly troubling the oil majors and the big independents. In the background, there is the worry of price volatility. Prices, he says, have become range bound between $80 and $120 because at $80, now the cost of fracking a barrel, firms can just stop fracking, reducing supply, and wait until the price rises again. That sounds reassuring for the North Sea but there, says Mr Welsh, costs are rising fast as companies desperate for skilled labour poach from each other by offering ever higher wages, making the business, despite historically high endproduct prices, still quite high risk. And that’s where the uncertainty caused by the independence referendum isn’t welcome. “You want fiscal and regulatory certainty,” says Mr Welsh, who worries that an independent Scotland cannot immediately provide that. “Scotland doesn’t have the regulatory and fiscal infrastructure, it would have to build it all from scratch.” And that, he fears, could turn out to be a big disincentive to invest in a Scottish industry that provides tens of thousands of jobs and billions of pounds in tax revenues on which the success of the Scotland economy, independent or not, critically depends.