Study predicts substantial job losses in oil and gas following price collapse

A STUDY examining prospects for activity in the UK Continental Shelf (UKCS) has projected a sharp decrease in medium- and long-term production from 2019–2050. The findings are consistent with substantial job losses and many undeveloped discoveries, said co-author Alex Kemp, Professor of Petroleum Economics at the University of Aberdeen.

Prospects for Activity in the UKCS after the Oil Price Collapse looks at possible levels of oil and gas production, field investment, and decommissioning activity in the UKCS following the recent oil price collapse, examining the 2019–2050 period.

As a result of the coronavirus pandemic, oil demand has reduced leading to price collapses and a volatile market, which even saw prices that were briefly negative in April of this year. Additionally, according to the study, gas prices have shown signs of weakness due to growing production in several countries, including Australia and the US.

The study examines prospects at different prices, with US$25/bbl, US$35/bbl, and US$45/bbl representing low, medium, and high prices for oil. The prices for gas were 20, 25 and 30 pence/therm (a therm is a non-SI unit of heat equivalent to 100,000 Btu).

Over the period to 2050, for oil at US$25/bbl, the study projects 4.7bn bbl could be produced economically between 2019 and 2050, whilst a further 2.3bn bbl (more than 32% of available oil) would not achieve economic production. At US$35/bbl, 5.7bn bbl could be produced economically, whilst 2.4bn bbl (almost 30% of all available oil) could not. At US$45/bbl, 7.1bn bbl could be produced economically with 1.9bn bbl (more than 21% of all available oil) failing to achieve economic production.

For gas at 20 pence/therm, 2.2bn boe could be produced economically whilst 1.4bn boe (almost 40% of available gas) could not be economically produced. At 25 pence/therm, 2.4bn boe could be economically produced, leaving behind 1.9bn boe (almost 45% of all available gas). For gas at 30 pence/therm, 3.1bn boe may be produced economically, but 2bn boe (more than 39% of all available gas) could not be produced.

The study finds that total hydrocarbon production (including natural gas liquids), will decline sharply over the investigated period, especially for sanctioned fields, with a faster decline at lower prices. Additionally, the decline is expected to be sharper for gas production than oil production.

Cumulative investment in field development over the 2019–2050 period is predicted to be £21bn (US$25/bbl scenario), £35.4bn (US$35/bbl), and £52.8bn (US$45/bbl) at 2020 prices. These figures, along with the projected production, indicate significant job losses and many discoveries going undeveloped said Kemp.

Initially, the majority of production is projected to come from already-sanctioned fields, with contributions also being made by existing and future incremental projects, probable and possible fields, new exploration finds, and technical reserves. At US$25/bbl no exploration finds are expected to contribute. In time, the study projects that technical reserves become more important, accounting for the majority of investment by 2041.

Of the fields that contribute to production, modelling predicts that lower-price fields will become uneconomic earlier with decommissioning taking place before the fields are fully depleted. However, the study projects that decommissioning costs are expected to amount to more than £37bn (at each price level) and notes that industry and government may prefer to delay decommissioning in the face of the resultant cash shortfall.

Kemp said: “The key point of our study is that it enhances information on the outlook for the industry with relatively low oil and gas prices. [Industry and the Government] then need to think about their own appropriate actions.”

He advocates that Aberdeen-based Oil and Gas Technology Centre (OGTC), which aims to be the “go to” technology centre for the oil and gas industry, should increase its efforts to enhance productivity through technological innovation, and that government should consider whether temporary tax reliefs are desirable.

In response to the study Ross Dornan, Market Intelligence Manager of the UK trade industry group Oil & Gas UK (OGUK), said: “OGUK continues to work with governments and the OGA [Oil and Gas Authority] to understand how we can protect the sector now, support its recovery and accelerate net zero opportunities. We know that low oil and gas prices, along with the impact of Covid-19 on operations, have created a very uncertain outlook as this report points out. This has resulted in difficult decisions having to be made by companies, with our recent Business Outlook Report warning up to 30,000 jobs could be lost.

“Remaining as competitive as possible to attract investment, alongside innovative and flexible approaches and business models, will be required to ensure we can not only continue to meet as much of the UK’s energy needs from domestic oil and gas, but also prepare the UK to fully capitalise on net zero opportunities of the future.”

OGA works with the government and industry to ensure that the UK achieves maximum economic benefit from its oil and gas reserves.

Following the release of its report Business Outlook: Activity and Supply Chain, OGUK called for urgent action to protect jobs and energy security, whilst placing net zero at the core of recovery plans.

A ‘green’ response to recovery loss

Following the release of Prospects for Activity in the UKCS after the Oil Price Collapse, energy research and business intelligence company Rystard Energy announced similar findings regarding a decline in oil recovery. As a result of the coronavirus pandemic, its annual global energy outlook found that 282bn bbl of the world’s recoverable oil would be “lost”, with the UKCS accounting for about 3bn bbl.

In response to Rystard’s findings, Senior Oil Campaigner for UK Greenpeace Mel Evans said: “This is a stark prediction for the UK oil industry and is yet more evidence that we need an urgent shift to renewable energy.

“We urge the government to pursue a green recovery from this pandemic that favours public investment in renewable energy and infrastructure over and above the shrinking oil and gas sector, and supports industry workers to retrain in sustainable sectors, such as decommissioning and offshore wind. This is vital for the climate, and for the future of these industries and the communities that depend on them in a zero-carbon world.”

Earlier this month, oil major BP announced that it would cut 10,000 jobs by the end of the year due to the economic impact of the coronavirus crisis. Furthermore, BP recently announced that it expects long-term economic impact caused by the coronavirus pandemic and that countries are likely to accelerate transitions to lower carbon economy as they seek to make their economies more resilient in future. As a result, the company has revised its long-term price assumptions, and is reviewing its intent to develop exploration intangible assets, expecting a loss of up to US$17.5bn as a result.

The oil price collapse caused by the coronavirus pandemic caused oil cartel OPEC (excluding Russia) to pledge to reduce output by 9.7m bbl (about 10% of peak world demand) from 1 May to 30 June, with further cuts coming in the period to May 2022. According to Prospects for Activity in the UKCS after the Oil Price Collapse, these measures resulted in a slight rebound.