What Future for the North East Oil Industry?

This article was originally published at http://nationalcollective.com/2015/01/04/renewable-energy-black-black-oil/ for National Collective and is reposted in its entirety here

The North Sea oil industry played a central role in the debate on Scotland’s future. It is a key aspect of the Scottish economy and a source of significant income to the Treasury. The collapse in the price of oil is a significant development, and while the Scottish economy is perfectly viable and healthy without the industry (even without oil and gas the Scottish GDPPC is still 99% that of the UK’s), we should not underestimate the challenges that currently face the industry.

As the price of oil plummets, the industry is put under intense pressure as the profitability of exploration and extraction is undermined, and it is likely this pressure will eventually come to bear with job losses. Whether it is in 20, 30, or more years, Scotland has to wean itself off of North Sea Oil and prepare itself for the post fossil-fuel age. After all, the Stone Age didn’t end because we ran out of stones.

First, we need to understand that Scotland is riding the tides of international geopolitics, and that it would likely have had to face these issues whether or not we had voted Yes or No- in the last six months XCite alone has seen its share price nearly half, from 62.5p to 38p. Secondly, the same amount of oil is under the North Sea whether we voted Yes or voted No. Thirdly, the impact of the progression of technology on an industry should not be underestimated.

One example is of gargantuan seaborne gas extraction platforms such as the Prelude [1]. This is a 600,000 tonne vessel designed to operate at sea for 25 years before requiring dry-dock maintenance and designed to extract gas from “stranded” fields too awkward to harvest using traditional methods. Advances like this make harvesting smaller, more remote, fields possible where building a rig may not be viable or profitable, potentially reducing long term running and decommissioning costs and increasing the profitability of the industry. It could create hundreds of jobs in shipbuilding creating these vessels as well as all of the staff that will be needed to crew the vessels themselves.

One explanation for the the price of oil remaining low after its initial collapse is OPEC’s desperation to prevent fracking from gaining prevalence at the expense of conventional oil production. OPEC’s raison d’etre is to control oil production and thus prices and its refusal to cut production (which would increase prices and ease pressure on extraction companies by increasing the price) is entirely deliberate.

It’s also noteworthy that there is a balancing act between fuel prices, tax take, energy bills, and economic activity. Whilst the price at the pump and on the meter isn’t directly related to the wholesale value of a barrel sucked out of the ground, some downward adjustment should be expected as production costs decrease for electricity plants. This is the positive side of lower oil prices – in a time of stagnant wages and high fuel bills a drop in retail costs for fuel or household energy could alleviate a lot of pressure for struggling people. Because working class people tend to actually spend their money, any drop in household bills could help support other economic activity.

Therefore, it is a far more complicated scenario in which we find ourselves than what triumphalist No campaigners would paint it as. North Sea oil revenue, through corporation tax, is a reserved issue, so it falls to Westminster to mitigate the consequences- the “broad shoulders” and “pooling of resources” about which we heard so much. None of this, however, addresses the fundamental issue which is the long term energy and economic security of the North East. Yes, we could move towards a model which utilises mobile extraction platforms rather than rigs, but that is not sustainable in the long-term. We need Scotland to wean itself off of oil and gas altogether and progress to more sustainable alternatives. One way to do this is an oil fund, but if oil prices remain low (which is unlikely, granted, but entirely possible), then this becomes more difficult. A mammoth issue like this requires complex and ambitious solutions.

Unlike renewable resources, fossil fuels are entirely susceptible to geopolitical events. The wind can’t go on strike and force a Three Day Week, nor can a war in the Middle East hike the price of the waves. It is not impossible that a conflict could arise that causes the price of oil to rise sharply as it did at the start of the millennium. Increasing economic growth could also increase demand, and hence the value of oil as a commodity. Investors looking to make an easy profit could buy up large amounts of oil, reducing supply, and increasing its value. Then, when commodity traders begin to sell up again, this could have the opposite effect.

The reason oil projections vary so wildly is because it is so difficult to anticipate the future of such a volatile resource. That the No campaign chose the most pessimistic forecasts and they happened to turn out to be accurate is almost certainly more attributable to sheer luck than economic acumen. Plenty of other forecasters anticipated increasing prices, and they were no less unlikely. For the price of oil to remain at its current low in the medium to long-term then supply would need to stay high or demand would need to stay consistently low. Neither of these are particularly likely. If the growth in fracking output was to continue, which is far from certain, there would presumably be a point in which traditional oil producers became willing to sacrifice market share and cut production in order to push prices up. As for demand, while the economies of Europe and North America may not be imminently heading towards growth, it is hard to imagine that demand for energy and fuel in China, India, South America and Africa will not continue to increase.

The Scottish Government has recently made fairly ambitious moves in the energy field. By acquiring the assets of Pelamis, the Scottish Government has stuck a marker in the ground and made a statement of intent. This was the Government securing renewable energy technology and bringing it into public ownership – two things absolutely essential as a step towards diversifying and securing our energy supplies. Yell’s community tidal scheme, partially funded by CARES (the Scottish Government scheme to support community renewables [2]) is a benchmark worldwide for how to facilitate communities developing clean energy from which they can all benefit.

Scotland’s huge food and drink industry also makes it a potential hotbed for the development of biofuels. In Brazil, sugar cane is used in massive plants called biorefineries which power entire cities and provide a majority of their transportation fuel through ethanol fermented from sugar cane and bagasse. Transportation accounts for about a third of greenhouse emissions, so by increasing our capacity of biofuel production we not only reduce demand for oil, but we reduce waste and CO2 emissions while creating highly skilled jobs. Biofuels can be produced by re-using food waste, by-products from food production, and other non-food waste (such as sewage) and cleanly converting it to transportation fuel or methane for domestic or industrial use. The Scottish Biofuel Programme [3] from the Scottish Government is helping support this industry through grants, which in rural areas could provide a way for brewers or farmers to get additional income streams from converting their waste to fuel alcohol. As many of these processes produce by-products that can also be used as animal feed, it offers a comprehensive set of solutions to a global problem.

By shifting emphasis from refining of oil and gas to production of biofuels and engineering of renewable energy technology we can revolutionise the industry of Scotland. The skill sets and knowledge already exist, especially in the North East of Scotland. We can’t afford to sit on our hands and complain about lack of control of our destiny over oil – especially if we can start moving away from it and start growing the industries that will be their replacement for the next generation.


[2] http://www.localenergyscotland.org/about/

[3] http://biofuels-scotland.co.uk/about


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