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Oil and Gas Analytical Bulletin

June 2015

Some help for the Scottish Government

The Scottish Governments first Oil and Gas Analytical Bulletin was published on the
11th March 2013.
Under the headline Oil Analysis shows boom years ahead, the accompanying news
release, now only available through the web archive service, suggested that prices
could exceed $150-a-barrel by 2020.
Updated Bulletins were published on 20th November 2013 and then 28th May 2014
to reflect a fall in revenues.
Since the last Bulletin, oil prices have fallen dramatically and the crisis in the industry
has worsened. Given the SNP Governments reluctance to publish an updated
version of the Bulletin, we have done so.
Oil Price
After reaching $115 a barrel last June, the price of oil plummeted to a low of $45 in
January.
The decline accelerated after Opec, led by Saudi Arabia, decided not to cut
production to support prices. Crude has since rebounded to around $65.
This demonstrates a changed economic context since the last Bulletin, and
underlines the need for other Scottish Government economic indicators to be
updated. The Scottish Government continue to base their predictions for the future
of Scotlands public finances on an oil price of $110 a barrel, which has been
described by the Finance Minister as a cautious estimate.

Looking forward, the impartial OBR have downgraded their estimate of prices in
successive forecasts. This is calculated by taking an average of prices implied by
futures markets.

A broad range of industry and economic experts have suggested that a lower oil
price will be the norm.
OBR March 2015
Quarter
forecast
BP Chief Executive: "I do think the industry
needs to prepare for lower for longer We
2015
$55.7
have got to plan on this [price] being down,
Q2
$62.1
and we don't know exactly what level, but
Q3
$64.4
certainly a year, I think probably two and
Q4
$66.2
maybe three years I think Scotland is going
2016
$67.6
to be under some stress because of these low
Q2
$68.8
oil prices."
Q3
$69.8
Q4
$70.6
Exxon Mobil Chief Executive: My view is
2017
$71.3
people need to kind of settle in for a while.
Q2
$71.4
Theres a lot of supply out there. And I dont
Q3
$71.4
see a particularly healthy world economy.
Q4
$71.4
2018
$71.4
Capital Economics: In our central scenario,
though, we expect the price of Brent will still
Q2
$71.4
be just $70 at the end of 2020.
Q3
$71.4
Q4
$71.4
Goldman Sachs: The new equilibrium price of
2019
$71.4
oil will likely be much lower than over the past
Q2
$71.4
decade.
Q3
$71.4
Q4
$71.4
CQS chief executive: The new normal in the
2020
$71.4
price of oil is a structural shift that is unlikely
to be reversed over the next decade.

Goldman Sachs: "We lower our Brent oil price assumption to $60-$65 for 2016-2019,
falling to $55 for 2020."
The FT has reported that more than $100bn of spending on new projects by the
worlds energy companies has been slowed, postponed or axed following the oil
price plunge, evidence of the drastic industry action to curb output in coming years.
Oil and gas production from the UK Continental Shelf was already in decline before
the fall in oil price, and that decline would have continued. The fall in oil price puts
marginal fields at risk, and could accelerate the decline in production sharply if
investment and exploration continue to fall.
Year
2010
2011
2012
2013
2014

Production (barrel of oil equivalent per day)


2.2 m
1.8m
1.6m
1.4m
1.4m
(36% since 2010)

Impact on Scottish Economy


Scotlands quarterly national accounts show Scottish GDP including the North Sea.
Onshore GDP has grown at a faster rate than total GDP for each quarter going back
to 2013.
A technical recession is where GDP falls for two consecutive quarters. The Scottish
Governments own national accounts shows that at the end of last year, the Scottish
economy including North Sea revenues contracted for two consecutive quarters.
Year Quarter

2013
2013
2013
2013
2014
2014
2014
2014

1
2
3
4
1
2
3
4

GDP
Scotland
onshore
3.4%
3.6%
4.0%
4.4%
3.1%
3.9%
4.0%
4.5%

Source: SNAP

GDP Scotland
including
geographical
share of oil & gas
1.0%
2.8%
3.7%
4.1%
1.3%
1.2%
-1.2%
-0.7%

These figures are current prices, and are not adjusted for inflation. Therefore they
are not official GDP growth rates. However, they do illustrate how falling oil prices
and production have impacted on total (onshore and offshore) Scottish GDP.
The Scottish economy has been sheltered from the effects of this contraction, and
wider economic effects, because it is an integrated part of the larger UK economy.
This point has been underlined by the Governor of the Bank of England.
Mark Carney said:
While it is a net positive to the UK economy the change in the oil price it
is a negative shock to the Scottish economy.
But it is a negative shock to the Scottish economy which is substantially
mitigated by the fiscal arrangements that exist in the UK the automatic
stabilisers that exist less revenue taken out of Scotland, more spending into
Scotland. And by the nature economic and financial union that exists in the
UK.
The impact on jobs will not be equal across Scotland.
A survey of businesses in the North East in May showed that nearly every
respondent (91 per cent) indicated that the decline in the price of oil has had, or is
expected to have, a detrimental effect on their business.
Over half of North East businesses have undergone a reorganisation or a
transformation of their people or culture in the last year.
A survey from the Aberdeen and Grampian Chamber of Commerce (published
11/6/2015), shows two-thirds of companies in the sector have cancelled projects.
76% of companies are less confident of the future than they were a year ago, which
is the lowest measure of contractors confidence since the start of the survey.
Break-even price
Oil market analysts take account of the fiscal break-even oil prices as one of the key
drivers of oil producing countries decision making. This is the price at which
producers balance their government accounts, which is a significant factor in
meeting the fiscal pressures facing many oil-producing countries.
A similar estimate can be made for Scotland to eliminate its fiscal deficit in the event
of either fiscal autonomy or independence, both policy goals of the Scottish
Government.
The independent OBR use an oil and gas ready reckoner to estimate the effect of
price changes on revenues. The OBR methodology states that an increase in the
price of a barrel of oil of 10 would increase oil and gas revenues by 750 million.

It is notable that the OBRs additional scenario, based on oil price rise to $100 per
barrel, lowers economic growth and increases the UKs deficit.
This reflects the issues outlined by the OBR in the caveats to the ready reckoners.
This is because higher oil prices put downward pressure on public sector revenues
from other sources. (Office for Budget Responsibility Economic and Fiscal Outlook
released in March, p.194).
In order for Scotland to balance the books under full fiscal autonomy, with
additional revenues from offshore revenues alone, would require an oil price of
over $200.
This is based on the OBR model whereby an additional 7.5 billion of oil and gas
corporation tax revenue would be associated with an oil price of over $200 per
barrel (100 per barrel increase on OBRs assumed exchange rate of $1.53 to 1.00.)
The basis for this calculation has been confirmed by the independent Scottish
Parliament Information Centre (SPICe). As the OBR note, higher oil prices would put
downward pressure on public sector revenues, so additional offshore revenues may
mean a fall in other income sources of the Scottish Government. Such high oil and
gas prices, over a period of a year or longer, would have serious impacts on revenues
from other, non-oil taxes, for example income tax and VAT. Additionally, as demand
is squeezed out of the economy, due to increased petrol and heating costs,
unemployment could rise and therefore spending on benefits may rise.
It is important to note that, as part of the UK, there have been no direct changes to
the Scottish Government budget based on the fall in oil and gas revenues.
Many oil producing countries, particularly OPEC members, have economies that are
less diverse than Scotlands, whereby the oil sector is a larger proportion of GDP and
government revenues.
The break-even price of other oil producing countries is outlined below:
Country
Iran
Algeria
Nigeria
Venezuela
Russia
Saudi Arabia
Iraq
UAE
Kuwait
Qatar

Price needed to balance budget


$131
$131
$123
$118
$105
$104
$101
$81
$78
$77

Source: Deutsche Bank & IMF


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Impact on Oil and Gas Jobs


As the responsible Minister Fergus Ewing noted in January, the oil crisis is the most
serious jobs situation that Scotland has faced in living memory.
According to Oil and Gas UK, the oil and gas sector supported 450,000 jobs across
the UK in 2014.
This includes 36,000 employed by operating companies, 200,000 employed in the
supply chain and a further 112,000 indirect jobs induced by the economic activity of
those directly employed in the sector.
Oil and Gas UK estimate that 45% of the total jobs supported by the industry are in
Scotland, therefore around 200,000 jobs are supported in Scotland.
Even before the most dramatic drop in oil prices the industry was estimating a
significant reduction in employment levels over the next three years.
A recent report, commissioned by Oil and Gas UK, Opito and the Department for
Business Innovation & Skills, cites 35,000 job losses from the UK industry over the
next three years. This includes industry jobs, supply chain and jobs supported
through employee spending. Around 15,750 of these job losses may arise in
Scotland.
Strathclyde Universitys Fraser of Allander published its most recent Economic
Commentary in March which considered the impact of low oil prices.
It is calculated that at least 1,435 job losses have been announced over the previous
8 months:
Many major operators in the North Sea are actively seeking to reduce their
employment in the UKCS. Chevron was the first to announce job reductions,
announcing plans to reduce its employment in Aberdeen by 255 in July 2014.
Shell announced 250 onshore job losses in August 2014 while in January 2015
there were four further announcements: BP announced a total of 300 job
losses, Schlumberger announced a reduction in its North Sea jobs of 100,
Talisman-Sinopec said it would cut around 300 jobs, broadly split across
permanent and contract staff and Conoco-Phillips announced plans to reduce
its UK employment by 230 (by roughly 14%).
The impact on sectors which rely on the industry is noted, along with the
disproportionate impact on the economy of the North East of Scotland:
Using the same jobs multiplier as Oil and Gas UK which is higher than for
many sectors - the announced 1,435 job losses detailed above could mean the
loss of more than 10,000 jobs across the UK as a whole, taking account of
direct and indirect effects.

Given the figures reported above on the residences of offshore workers, it is


likely that any indirect job losses could be concentrated in the North East of
Scotland
The figures on job losses calculated by Fraser of Allander are likely to be conservative
as they only reflect public announcements by larger companies before March 2015.
An updated analysis, based upon press reports which include smaller companies and
contractors, is included at the end of this Bulletin. It suggests that the total of direct
job losses across the sector is around 4,000.
The change in the economic environment has been noted by local employers. Last
year a survey of businesses in the North East forecast employment growth of 15% by
2016. The same survey in May forecast a fall in employment of 8% over the next
two years, to April 2017.
A report by recruitment specialists Manpower this week cited oil as a key factor in
Scotland being the worst-performing nation or region of the UK on job creation.
Scotland had the largest fall in hiring year on year.
Amanda White, operations manager at Manpower UK, said:
"Last quarter, we reported that the fall in oil prices had hit Scotland's jobs
outlook hard, and, unfortunately, we have not seen much of an improvement
this quarter. Downbeat hiring intentions and a waning oil and gas industry
are casting a shadow over hiring intentions here in Scotland and we expect
this to continue."

Impact on Tax Receipts


The most recent OBR oil and gas revenue forecasts show that SNP White Paper
projections for an independent Scotland overstated revenues by around 30bn over
five years.
OBR projections are over 10bn less than the SNPs most pessimistic projection, and
almost 30bn less than Scenario 4 which remains the SNP Governments preferred
projection.
201415

201516

201617

201718

201819

Total 2014-15
to 2018-19

Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Scenario 6

3.3
4.0
5.4
5.8
5.5
5.6

3.4
5.5
7.4
8.3
8.3
9.0

2.9
4.7
6.2
6.9
7.5
7.8

3.1
4.9
6.5
7.3
8.2
8.3

3.2
4.8
5.9
6.0
7.4
8.0

OBR

2.34

0.63

0.54

0.63

0.72

3.5

7.7

6.4

6.7

5.3

29.6

Scenario 1
1
2.8
2.4
Source OBR March Outlook, Table 4.5

2.5

2.5

11.1

Scenario 4
difference

15.8
24.0
31.4
34.3
36.8
38.7

4.86

Most
pessimistic

This assumes a 90% of total UK estimates for Scotland.


As both GERS and HMRC estimates show, this is very generous.

The Scottish Parliament Information Centre is unable to replicate the Scottish


Governments six scenario estimates as the Scottish Governments dataset or
modelling software is not available.
Full fiscal autonomy
The Scottish Government remains committed to Full Fiscal Responsibility in the
medium term.
The independent and impartial IFS have calculated that Scotlands relative fiscal
position is worsening compared to the UK. Scotlands deficit is projected to be
double that of the UK as a whole as a share of GDP.
The IFS estimate that 7.6bn is just to get to the point of the UKs deficit, in effect a
cost of fiscal autonomy. Towards the medium term this rises to 9.7bn.
Net fiscal
balance

201314

2014-15

2015-16

201617

201718

2018-19

2019-20

% of GDP
Scotland

-8.1%

-8.6%

-8.6%

-6.8%

-5.4%

-4.6%

-4.6%

UK

-5.6%

-5.0%

-4.0%

-2.0%

-0.6%

+0.2%

+0.3%

Difference -2.5%

-3.7%

-4.6%

-4.8%

-4.8%

-4.8%

-4.9%

Cash-terms
-3.8bn
difference

-5.9bn

-7.6bn

-8.2bn

-8.5bn

-8.9bn

-9.7bn

Source: IFS
The impartial experts at the Scottish Parliament Information Centre (SPICe), using
the SNP Governments own economic model, confirmed that reducing public
spending in Scotland by 9.7 billion would cost 189,000 jobs.
The direct impact of the spending is 120,000 full-time equivalent jobs (64%), the
indirect (largely the supply chains to the public sector) and induced impacts
(spending by employees on the high street) is associated with 69,000 full-time
equivalent jobs.
Historic analysis of GERS shows that since 1990, Scotland has only been in surplus for
one year and in deficit for 23 out of 24 years. This demonstrates the challenges a
policy in favour of full fiscal autonomy will face, even in the medium term.

Reported job losses


Ace Winches Aberdeenshire engineering company announced 10 job losses as low oil prices
continued to impact on the north-east economy. P&J 13/02/15
Amec Foster Wheeler said it was consulting on about 100 onshore posts in Aberdeen. P&J
28/04/15
Apache one of the North Sea's biggest producers, will impose a 10% reduction on its
contractors' wages from January 1st. P&J 21/11/14
Archer the International Oil Field Service firm said it had already laid off about 135 workers
at its offices in Blackburn, Aberdeenshire. More than two-fifths of the 1,000 job losses
anticipated at international oilfield service firm Archer will be in the UK. P&J 24/02/15
Axon 25 jobs to be cut from Arbroath plant P&J 21/02/15
Baker Hughes and Halliburton expected its headcount adjustments to be in line with its
main competitors (globally up to 7,000 redundancies). They will announce at end of first
quarter. Reuters 20/01/15
BP plans to cut 300 jobs in the North Sea. P&J 16/01/15
BG Group warned of further job cuts and budget slashing as it also revealed it had wiped
4billion off the value of oil and gas assets globally to reflect the sharp fall in crude prices.
BG group which has about 500 people working out of its Aberdeen offices said it needed to
shave 10% off headcount costs among its 5,200 strong global workforce in 2015. P&J
22/03/15
Burntisland Fabrications (BiFab) concerns for jobs at the Arnish manufacturing yard in Lewis
are growing as the site finishes its last big order amid a slump in oil and gas industry. Daily
Record 18/02/15
Cairn Energy have axed 90 jobs but do not say location (most were voluntary redundancies).
P&J 14/01/15
Chevron lost 225 jobs in Aberdeen last July. P&J 17/07/14
ConocoPhillips is cutting 230 jobs in UK, although no confirmation on location. P&J 22/11/14
DOF is looking to cut at least 20 positions from UK staff. P&J 01/04/15
EnQuest is proposing to cut 9 jobs from its UK workforce. P&J 01/04/15
Expro the oil and gas exploration firm is set to cut 60 jobs across the UK with dozens of
redundancies expected in Aberdeen. It said a downturn in the North Sea caused by a slump
in the value of oil had motivated the decision. EE 17/03/15
GE Oil & Gas is looking at redundancies as part of business restructuring. P&J 17/04/15

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Isleburn the Global Energy subsidiary, based in Aberdeen and Easter Ross, announced 90
jobs are to go. P&J 14/05/15
Halliburton announced potentially 216 job losses from North East and 22 in Arbroath, as
part of wider jobs losses. P&J 13/12/15
Hunting the oil and gas services and engineering company has its main manufacturing base
at Badentoy in Portlethen, job losses in 2nd quarter 2015. P&J 16/02/15
KCA Deutag has announced plans to cut up to 230 jobs in Aberdeen as it grapples with a
slowdown in North Sea drilling. Overall the drilling contractor said 500 jobs across its
business spanning 20 countries were at risk, while it would also cut staff wages by 5%
across the board. The company employs 10,000 worldwide and 1,200 in its North Sea
offshore business. P&J 12/02/15
MacKellar Sub-Sea Ltd (Grantown-on-Spey) goes into administration. There have not been
any immediate redundancies at the company. The company employs 97 full and part-time
staff. P&J 18/02/15
Maersk Oil & Gas restructuring proposals could affect 35 onshore staff; 19 contractor
positions to be cut. P&J 17/04/15
Nexen has announced 50 jobs to be cut from its North Sea workforce. P&J 18/03/15
Petrofac could be making a number of job losses after Marathon Oil said it would be
reviewing how it maintained and operated its Brae field in the North Sea. Petrofac has since
announced a 45-day consultation period which began in Jan with affected employees. P&J
4/03/15
Premier Oil The crash in oil prices has forced oil and gas explorer Premier Oil to cut spending
on development next year (2016) by 40% and the company will cut 20 jobs. P&J 19/03/15
Rowan Drilling 900 jobs could be lost at-risk notices sent to 429 staff so far. P&J 24/04/15
Shell (250 already announced in August 2014) Shell UK plans to cut 250 posts from its North
Sea operations and change offshore shift patterns, as part of a drive to manage costs. EE
26/03/15
Schlumberger around 100 jobs are understood to be in the North Sea sector (9000 globally).
Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological
survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.
P&J January 2015
Subsea 7 the offshore engineer Subsea 7 has announced regrettable plans to axe 410 jobs
in the UK following a downturn in activity triggered by falling oil prices. The Norwegian firm
employs about 1,800 people in Aberdeen and said the cuts would affect onshore staff and
contractors in the city and at its London office. Scotsman 13/05/15

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Specialist Subsea Services (S3) has gone into administration at the cost of 77 jobs. A total of
77 of the company's 82 staff were immediately made redundant, and assets are being
marketed for sale. P&J 05/03/15
Stork is consulting on redundancies as of April 2015. P&J 10/04/15
Swire is cutting 50 jobs from UK workforce. EE 24/04/15
Taqa 100 job losses announced. P&J 26/03/15
Talisman-Sinopec said it would slash 300 jobs from its operations in the North Sea. P&J
21/01/15
Total plans to sell North Sea assets and may consider Aberdeen job cuts unless prices rise
and taxes are cut. P&J 13/02/15
Tullow Oil is gearing up to announce job cuts by the end of the first quarter. P&J 13/01/15
Varco up to 100 jobs could go. EE 09/06/15
Weatherford speculation that 100 jobs would go. P&J 06/02/15
X Subsea UK and X Subsea Atlantic Aberdeen Companies in administration with the loss of
20 posts. P&J 29/04/15

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