The practical challenges of tackling coronavirus on a cramped North Sea oil platform cannot be overstated — living spaces are often shared, two-metres social distancing is tricky and often unenforceable. This is an industry defined by the fact that privacy is left behind onshore. With staffing levels falling by 40 percent in recent weeks, the industry is already being forced to take drastic steps to address such vulnerabilities.
Practical challenges aside, the North Sea oil and gas sector is once again facing a bleak outlook, at least for the time being.
The combination of the COVID-19 pandemic and a prolonged price war between Saudi Arabia and Russia have pushed the industry benchmark, Brent crude, to below $35 per barrel, down 45 percent from the start of the year.
While similar crashes have happened twice in recent memory – in 2014 and 1986 – the combination of a wider economic shutdown and plummeting prices is unprecedented. With both supply and demand in freefall and storage capacity at a premium, entire oil producing regions remain vulnerable to shut down, despite a tentative OPEC deal between the warring parties to slash production.
In Scotland, the UK government’s furlough scheme, now extended to the sector’s large freelance contractor workforce, has eased some of the immediate pain. But since the crisis began, a near-daily roll call of cutbacks has cast doubt on whether the economics of making oil and gas flow from the North Sea can remain viable.
With debates about how best to transition from oil and gas to low carbon technologies ongoing, all eyes are now on the Scottish and UK governments and how this crisis could spur or constrain their net-zero emissions commitments.
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Tough times
In the current context, with the possibility of a global depression drastically depleting jobs, skills, infrastructure and supply chains, some are beginning to wonder whether a recognisable UK oil and gas industry will survive the crisis.
Almost 300,000 jobs were lost in the wake of the 2014 crash and union leaders have now raised the prospect that the sector could be “wound up” within a few years. Could a similar implosion in employment occur before the building blocks of a “just transition” are in place?
Professor Alex Kemp, Director of Aberdeen University’s Centre for Research in Energy Economics and Finance, disagrees with warnings of outright collapse. However, the veteran North Sea expert explains the uniquely difficult circumstances presented by this crash:
“The problem with the present reduction is that it’s come at a time when the industry was still just recovering from a fall in the oil price from late 2014 onwards. So the industry has already experienced a big price reduction and has taken steps to cut costs, and a whole lot of people have been made redundant,” he says.
“The supply chain, even when the price was $60, not very long ago, was still not getting full order books. The supply chain was still, if not struggling, at least was not finding it easy,” he adds.
While the sector has been through prolonged restructuring in recent years, often drawing on private equity to keep offshore operations viable, the range of economic activity that supports oil and gas extraction onshore is now even more precarious.
Wartime measures?
While European leaders talk of a “wartime economy” and a “New Marshall Plan” to tackle the dire economic consequences of COVID-19, with even the Financial Times calling for “taboo-breaking” government intervention, it remains unclear whether this moment will be used to enact a decisive shift away from fossil fuel extraction in the waters off Scotland’s east coast.
In February, the Scottish Government’s Just Transition Commission – which brings together trade unions, environmentalists and academics to advise how to put workers at the heart of cutting dependency on high carbon industries – called for “urgent action” if Scotland is to meet its climate targets.
In the North Sea, the commissioners called on government to “push industry to ensure that sufficient concrete actions are being taken to deliver a just energy transition.”
However, rather than signalling a renewed mobilisation towards net zero, the UK Oil and Gas Authority CEO Andy Samuel stated on 24 March that his agency would now be “flexible” in achieving this goal.
The Chancellor’s pre-crisis budget on 11 March maintained the status quo in the North Sea – and, as the letter points out, the clamour for specific measures has yet to be addressed. As with the support for other emissions-heavy sectors such as aviation, the question of whether “green strings” will be attached to support remains potent.
On Monday 7 April, in a cross-party letter to the Chancellor, four North East Scotland MPs cited the crisis as evidence of the need for a Just Transition Fund to protect the region’s economy and called for “real, tangible, directed support for the sector to help see it through the price collapse”.
Read DeSmog’s Special Series – A Just Transition: From Fossil Fuels to Environmental Justice
For Professor Kemp, a key measure that could mark a decisive change in policy is a ‘sector deal’, an idea proposed by Westminster’s Scottish Affairs Committee in 2018 and widely debated since.
“An energy related sector deal could encourage the development of renewable technologies, investments and new ideas to get the cost of renewable technologies down. A sector deal that was energy-related would include oil and gas because the oil and gas companies will actually do a lot of the work in the renewable sector,” he explains.
But whether such a deal could provide the level of intervention necessary to repurpose supply chains remains unclear. Indeed, in recent years the failure to build local supply chains for renewables in Scotland has proved deeply controversial, particularly when it comes to Scotland’s burgeoning offshore wind sector.
Corporate welfare?
It is the stated aim of the Scottish government that the North Sea should become the world’s first net-zero hydrocarbon basin. However, with COVID-19 exposing the incapacity of market forces to deliver public goods, will policy makers be content to hope that the existing economics of fossil fuel extraction can deliver on this target?
While smaller companies that have emerged in the North Sea since 2014 may be more nimble and better able to diversify, it is also feasible that a wider economic policy that benefits asset-holding and offers “corporate welfare” could encourage such private equity-backed firms to stick with the devil they know.
With the Bank of England and the US Federal Reserve pumping enormous sums into financial markets in response to the crisis, the immediate decisions taken now about how the North Sea functions in a world of prolonged oil price instability, will have major implications.
Last year, an alternative was suggested by Johanna Bozuwa and Carla Skandier of Democracy Collaborative, in a paper for Common Wealth. They point out that central banks could, for a fraction of the outlay involved in fiscal stimulus programmes, purchase majority stakes in fossil fuel companies:
“Answerable to the public and without the growth imperative, the government would be much better poised to manage their decline by directly cutting fossil fuel production from existing and under development sites in accordance with a 1.5 C global heating rise limit – as well as stopping new developments that are clearly outside the carbon budget,” they argue.
Professor Raphael Heffron, Chair of Global Energy Law and Sustainability at the University of Dundee, and an expert on Just Transition policy, sees the current crisis as an opportunity to reconsider the role of the oil and gas sector, which, he argues, is diminishing in terms of both the human capital it requires and the amount of wealth it generates:
“This has the potential to really highlight the need for change and the over-reliance on an industry that maybe isn’t delivering on modern aims for society,” he says.
Heffron also identifies a controversial factor that has played a part in the recovery and restructuring of the North Sea since 2014:
“There’s a reason why we have these corporate backers of different types of capital funds supporting such a market, because most of the money and profits are not staying within the UK.”
“As we think about the crisis, and we think about how our economies are going to rebound after the crisis, wouldn’t it be great if the profits from our energy use in the UK, are invested properly in the UK instead of going to … foreign companies and foreign executives?”
Contrasting the Scottish government’s Just Transition Commission with equivalent bodies around the world, Heffron argues that it now needs to be bolstered. With broader representation and perhaps even statutory powers, the Commission could be a vital mechanism for framing a longer term response to the crisis, he argues.
“If you want something for 2030 you need to be investing in the supply chain now. You need to be changing legislation and regulation now. You can’t be spending four or five years debating the various outcomes … you need to be thinking about the structural changes.”
Image credit: Michael Elleray/Flickr CC BY 2.0
