The crunch goes offshore
The North Sea oil and gas sector was seen as the cushion that might help Scotland weather the credit crunch. But not now.
The first casualty is due to be confirmed some time this week, as Canadian-based Oilexco confirms the administrators are moving in to its UK subsidiary, Oilexco North Sea Limited, which comprises all of the parent company's assets.
The bosses in Calgary, Canada, are not actually calling in the corporate undertakers, but the leader of its lending consortium is doing so, and that happens to be the publicly-owned Royal Bank of Scotland.
One interpretation of this is that RBS, as with other banks, is calling in its more questionable loans before the imminent deadline for signing off its accounts for the annual report, due for publication in six weeks.
Oilexco is not exactly one of the oil giants or a well-known forecourt brand.
As with much of the North Sea these days, exploration is carried out by smaller firms - even if small, in this case, means a London and Toronto stock market valuation less than a year ago of £2bn.
And unlike the giants, such speculators have to look to banks to provide finance.
It's not only that the banks become more risk averse, but the oil industry is being transformed by the sharp fall in oil prices.
Last summer, it soared to $147 per barrel.
By last week, it sank below $40.
Today, it rose markedly to top $50, due to concerns over the Middle East conflict.
But that is far from providing a safe margin for North Sea explorers, who face one of the more expensive environments in which to operate.
Some were investing on an assumption of at least $70 per barrel, and may be considering pulling back.
We should find out more about the overall picture from the industry body, which publishes its annual review of activities in just over a month.
Oilexco reckons there are strong assets that can be sold on to other explorers, including exploration licences and contracts through to next year, including a semi-submersible.
If they can find buyers, it is hoped the 50 Aberdeen-based staff and their systems can be kept together as a going concern.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at ³ÉÈË¿ìÊÖ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 6th Jan 2009, powerpnin wrote:Douglas getting in a quick anti-independence jibe in his new job.
Just out of interest how many jobs will go at their HQ situated in London?
If Scotland had independence and not regional status it would be much less likely to suffer the regional withdrawl symptoms of the UK.
I presume the London HQ is to stay?
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Comment number 2.
At 7th Jan 2009, dennisjunior1 wrote:Douglas:
It is sad that the crunch has to go off-shore....
~Dennis Junior~
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Comment number 3.
At 7th Jan 2009, Wee-Scamp wrote:Oh dear. Yet another journalist that doesn't understand the oil industy.
Why isn't he screaming out for Gordon Brown to cut the huge taxes he imposed on the oil and gas industry?
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Comment number 4.
At 7th Jan 2009, srh1978 wrote:It was actually Oilexco who didn't understand the oil industry.
They were full of themselves crowing about how many wells they were going to drill, what they forgot to mention was that they were $350k a day for their rigs and couldn't cover the costs without massive debt facilities.
Their hope was to build up their projects then be bought over by someone else at $100 plus a barrel. They hadn't factored in any potential for the oil price to slide and when it did in combination with the credit drying up they were snookered.
The big old majors may be slow and cumbersome but the due dilligence they apply means they don't end up in these situations.
Oilexco have been exposed
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Comment number 5.
At 7th Jan 2009, AngusMiasma wrote:Re: powerpinn (post #1).
Your comment about a quick anti-independence jibe smacks of paranoia. No-where does Douglas make that assertion.
He is simply outlining a basic fact of economics.
The biggest reserves in the North Sea - and therefore the easiest to extract - have long since hit full maturity.
And while other smaller sites continue to be discovered, they are by their very nature harder to tap, and therefore much more expensive to invest in.
Now that the oil price has plummeted, the more difficult wells are much less appealing to investors and they are less likely to invest in them - leading to job losses.
It sounds very much like this could be an early warning sign of what will eventually happen to the Aberdeen oil industry.
In the short term (ie a few years) oil prices will go back up and hopefully the oil industry in the Granite City won't be too badly hit in the interim.
But one thing is certain. The days of cheap oil in the North Sea are numbered - oil being, by its very nature, a finite resource.
I won't get drawn on how long the reserves will last, as these figures get revised all the time and to pluck a figure out of the air would be foolhardy.
But at some point they will eventually dry up or become too cost prohibitive to extract, regardless of what anyone in the pro or anti-Union camps says.
That is what Douglas seems to be highlighting - namely the cost prohibitive angle. Today's news could very well be a warning sign of what is to happen in 'x' amount of years time.
It happened with deep-pit coal mines in the UK from the 50s onwards. Gradual decline, and then a sudden collapse (which wasn't helped by some of the ludicrous policies taken in Westminster at the time).
Let's hope that Aberdeen's push towards developing a green energy industry will come to fruition quick enough to spare it from the fall-out when its oil industry does eventually die - something which I hope is still decades away.
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Comment number 6.
At 7th Jan 2009, U13772457 wrote:An excellent post, Mr Fraser. I've linked to it on my blog:
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