My column will evaluate the causes and effects of changing energy industries, with a large focus on socio-economic effects. It will examine the changing government policies as we transition towards a lower carbon future.
The Declining North Sea Oil and Gas Industries
Drilling for oil and gas on the North Sea shores first began in 1851, when oil was first extracted from torbanite rocks in Scotland, however, larger scale drilling did not begin until the 1960s. Offshore oil and gas was first discovered in larger quantities in 1965 and 1966, respectively. These recent discoveries combined with the UN’s Convention on the Continental Shelf; which gave countries with coastlines on the North Sea exclusive economic zones to license development across their designated areas; allowed and incentivised a much larger scale economic operation in the North Sea.
Economic activity continued to flourish and grow within the North Sea oil and gas fields in the late twentieth century, aided especially by the 1973 and 1979 oil crises which quadrupled and tripled the prices of oil respectively. Many companies began to drill and operate within the North Sea, including Shell, BP, INEOS Group, Harbour Energy and Neptune energy. The drilling activity increased to a peak of 1.7 billion barrels produced in 1999, which equated to around 6 million barrels per day, which marked the golden age of the area’s oil industry. As a result of this growing economic activity, many areas in the Northeast of Scotland, particularly around Aberdeen, began to see lots of benefits, this included higher employment, higher personal wealth and growth of sectors which supported the oil and gas industry. It is estimated that at its peak, around half a million people were employed either directly by oil and gas companies or indirectly involved at different points along the supply chain.
However, recently the industry has begun to slightly decline, this is due to changing government policies, the beginning of a transition to a lower carbon future and production costs in the North Sea being considerably higher than other regions, making it sometimes more cost effective to import oil from elsewhere rather than use our own. Production of oil and gas in the North Sea has been steadily decreasing at a rate of around 5-10% annually from 1.7 billion barrels in 1999 to 552 million barrels in 2022, which is a 67% drop in production. Government predictions suggest that production will fall to 251 million barrels produced in 2030 and then again to 58 million barrels in 2050. Similarly, to falling rates of production, revenues have also plummeted in the last decade, from £10.6 billion in the 2008/2009 financial year to £0.5 billion in the 2020/2021 financial year, representing a 95% decrease in revenue receipts, alongside this, the percentage of national income (GDP) made up from this revenue has decreased by 97% from 0.67% to 0.02% in the previous timescale.
A major issue contributing to the decline of UKCS (United Kingdom Continental Shelf) is the rapidly rising production costs, where in spite of the declining drilling activities in the North Sea, net production costs continue to soar nevertheless, from less than 5 million in the early to mid-2000s to in excess of 8 million. Due to the large amount of drilling that has already occurred within the North sea, there are now reduced reserves and the estimated proven resources, this is the amount of natural resources that are economically recoverable from the area, falling from an initial 8.4 billion barrels in 1980 to less than 2.5 billion barrels in 2020.
Changing government policy has also strongly influenced the amount of activity within the North Sea oil and gas industry. Recently, the UK government has increased the Energy Profits Levy (EPL) to 38% from the 1st November this year, which brings the headline rate of tax on upstream oil and gas activities to 78%, this is obviously a large deterrent to companies operating within the area. According to Offshore Energies United Kingdom, the industry’s trade association, the predicted investment to the industry is set to fall due to higher taxes and tax deadlines, which could cause further damage to the industry.
These factors have combined to cause a large decline in the North Sea oil and gas and its surrounding industries, this is evidenced by many companies reducing or ceasing operations within the area, for example, in the previous year, Harbour Energy let 350 workers go as a part of restructuring internally. Another example of this occurred in May this year, when Chevron; a prominent oil operator in the area; sold its 19.4% stake in the Clair field after operating for 55 years and similar things are happening within other companies operating within the area such as, Exxon Mobil, BP, and Shell.
Substantial amounts of job losses are thought to be one of the most devastating effects of the declining industries, for example the numbers of jobs supported by the oil and gas industry has more than halved in the last decade. This is causing a general opinion of fear within groups of people of repeating effects of the mine closures in the mid-1980s, where many were left jobless and unable to find employment due to lack of investment, leading to poverty. While many people would argue that most workers within the oil and gas industry have transferable skills and would be able to find employment elsewhere, there is a lack of other industries within the North-east of Scotland, meaning that the many people would in fact struggle to find jobs within the region.
In addition, the declining oil and gas industries in the Northeast of Scotland also has impacts upon towns and cities, particularly Aberdeen – the UK’s oil and gas capital. This is due to decreasing traffic passing through the areas before heading to offshore drilling platforms, this has led to decreased revenue for local shops, restaurants, and taxi services.
As the UK begins to move towards a lower carbon future, particularly under the new policies in place from the labour government, it is important to have a smooth transition to aid workers moving into newer, potentially more sustainable industries, in order to prevent large scale sudden unemployment and poverty that many people still remember and fear after the mine closures in the 1980s.