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UK’s Oil & Gas Deflation: What are the Consequences?

Published 04/17/2015, 07:10 AM
Updated 07/09/2023, 06:31 AM



After finally collating the data, the statistics are in, and the UK officially had its worst year for oil and gas investments since four decades ago. The turmoil will be unsurprising for anyone who has been following news on oil prices, which have been falling steadily since the end of last year. The news was reported by industry representational body Oil & Gas UK, which put the UK’s expenditure at £5.3billion more than its revenues.

The staggering amount has also been expedited by the lack of completed drilling projects; a mere 14 of the planned 25 actually went ahead. This is also due to a slowing down of artic drilling expeditions, a number of which have been abandoned due to ongoing opposition from environmental groups and dangerous weather conditions.

According to financial forecasts, this isn’t likely to improve very much in 2015 either. Both drilling and investment in the oil and gas industry is predicted to fall even further, with analysts predicting annual investments to drop as low as £2.5billion within three years.

Production costs are also rising steeply, up 8 percent from last year. This signals that much fewer projects will be given the green light in 2015, and investors may have to rely on stocks and profits from the currently ongoing work.

Low oil prices have been attributed to a number of factors. Foremost, stagnating or slowing economies in once booming regions means demand has lessened, whilst the price of extraction is at a record high. The ability of the UK to secure a financial future for oil production and exportation is, according to industry experts, being hampered by poor regulation and unnecessary tax breaks.

In the UK, the North Sea oil extraction business has been suffering further from falling oil prices, with research suggesting almost three-quarters of oil and gas workers would consider looking for opportunities overseas, with a lack of job security cited as the main reason. Long term work in the UK’s oil industry is becoming less and less likely with lower investments over the next 5 years inevitable.

Criticisms have also been aimed at the British government, and in particular, George Osborne. In January, the chancellor announced a series of tax cuts intended to entice investors to the North Sea Industry, including a £1.3 billion stimulus package to support the industry, as well as cuts to the supplementary charge for oil companies from 30 to 20 percent. Osborne has been under much pressure to implement alleviating measures to the struggling North Sea Industry, even more so following BP (LONDON:BP)’s announcement that it was cutting more than 500 jobs in the sector.

In response to the statistics, George Osborne promised further measures would be taken to protect the North Sea workers. The chancellor stated he would be focusing on improving exploration levels and sustaining many of the UK’s long-term industry investments, which also includes foreign investments in offshore drilling and exports of bunker fuel.

Workers unions are also ready to take industrial action if the government fails to intervene effectively. Union groups Unite and RMT have stated that the UK must take action to keep skilled oil workers from migrating abroad, and failing to do so will further compound the industries poor performance.

Alongside Canada, the UK is the hardest and most expensive places to produce oil on the planet, meaning the continued slump in oil prices cannot be as easily absorbed as naturally oil rich nations such as Iraq, Kuwait, or Saudi Arabia, which currently stocks a massive reserve worth around $750billion.

Success in the North Sea directly correlates with the strength of the British economy. The prominent inclusion of the SNP means the issue is likely to be a popular topic amongst voters and during the debates in the upcoming general election.

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