June 2, 2013 12:21 pm

Aberdeen rides the wave of prosperity created by oil industry

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Ships dock in Aberdeen harbour©Getty

For a flavour of the remarkable renaissance being enjoyed by the North Sea oil and gas industry, it is only necessary to spend a little time in Aberdeen.

Unemployment in the booming north east Scottish port city is less than half the national average and house prices have more than doubled in the past decade.

Restaurants and bars are full of oil workers enjoying the overspill from what is expected to be a record £13bn investment in offshore oil and gasfields this year – not bad for what has long been seen as a declining industry.

After a long slide from its 1999 peak, the industry is now poised for a “significant upturn”, says Oil & Gas UK, a trade body, with offshore production set to grow to around 2m barrels of oil equivalent a day by 2017 from 1.5m boe/d or less this year.

But such upbeat numbers raise an obvious question: how long can the good times roll?

The answer will have implications far beyond Aberdeen. Offshore oil and gas satisfy nearly half the UK’s primary energy demand, the industry supports hundreds of thousands of jobs and it accounted for nearly a quarter of all UK corporation tax in 2011-12, according to John Paterson and Greg Gordon of Aberdeen University.

The industry’s prospects could also help decide Britain’s constitutional future amid increasingly fierce debate in Scotland ahead of its independence referendum next year.

Supporters of continued membership of the UK say an independent Scotland would be uncomfortably reliant on an uncertain and depleting resource.

But independence activists see renewed offshore activity as bolstering their case that Scotland would be better off on its own – and say pro-union politicians have a record of downplaying the North Sea’s prospects for political advantage.

The ruling Scottish National party has seized on a recent admission by Denis Healey, former Labour chancellor, that London had underplayed the value of offshore oil in the 1970s “because of the threat of nationalism”.

Even without any political agenda, oil industry forecasting is a fiendishly difficult business, given the sector’s sensitivity to a complex interplay of influences including energy price trends, technological progress and tax policy.

All three factors have played a major role in the current flurry of activity.

The surge in investment came only after George Osborne, the UK chancellor, agreed to soften the impact of a 2011 £2bn tax raid on the sector and promised companies relief on the costs of decommissioning old rigs and pipelines.

High oil prices make it worthwhile for oil businesses to invest in more challenging fields, even as they spend more to maintain rapidly ageing offshore facilities.

And companies can use increasingly accurate three dimensional seismic imaging to navigate drills horizontally far below the seabed, with new fracking techniques then available to force out more of the oil or gas than was previously possible.

Oil & Gas UK suggests 15bn to 24bn barrels of oil equivalent can be considered recoverable from the UK’s continental shelf.

That is considerably less than the around 41bn barrels that have already been brought ashore, but Scotland’s government says that at a “conservative” oil price of $113 per barrel, Scottish North Sea tax revenues could be worth £48bn over the next six years alone.

“More than half of the value of the North Sea’s oil and gas reserves [has] yet to be extracted,” says Alex Salmond, Scotland’s first minister and a former energy economist.

Still, Alex Kemp, professor at the University of Aberdeen Business School, says careful management will be needed to promote exploration for new reserves and maximise exploitation of those already being tapped.

Economic modelling assuming oil at $90 a barrel, suggests that production will rise for a few years but then decline “at a fairly brisk pace”, Prof Kemp says. Brent crude was quoted at just over $100 a barrel on Saturday.

The prospect of renewed production decline is a reminder that no boom can be taken for granted. Yet even if oil income falls, the blow to Aberdonian fortunes will be softened by the looming need to decommission North Sea infrastructure – a task that will cost tens of billions of pounds.

And many of the area’s oil service companies and workers are already applying North Sea skills to fresher fields overseas, says one senior industry consultant. “Everywhere I go related to oil, from Uganda to Houston, I hear Aberdeen accents,” he says.

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