THE Offshore Europe 2009 event descends on Aberdeen next week, a vast jamboree of sellers and buyers of technology, makers and users of equipment – indeed of movers and shakers of all types from all round the world.
More than 40,000 people are expected to visit the exhibition centre every day, a quite staggering reminder of just how much Aberdeen is at the centre of a global industry. But for how much longer?
Those of us in central Scotland, as we shell out a
pparently ever-increasing sums at the petrol pumps, tend to assume that the oil industry must be in great shape. But a trip to Aberdeen this week told me that this is a dangerous assumption.
A metaphor for where Aberdeen is now can be found in the city centre. Beside the railway station, builders are frantically putting the finishing touches to a big new shopping centre and a 250-room hotel, which is fully booked for next week. Up on Union Street however, To Let and For Sale signs have sprouted above empty shops and offices.
Which is the more reliable indicator of where Aberdeen and the oil industry will go next? My money is more on the shiny new stuff than the declining old frontages, but it is not a sure-fire bet.
On the business side, it was surprising to learn that half of all oil companies admit they are struggling in the current business climate. (This figure stems from interviews with 31 chief executives and senior directors of oil companies carried out in the past three months by Aberdeen Business School, Robert Gordon University.)
Nine out of ten of these struggling companies complained they were being let down by the banks.
One company said that having secured drilling rights and licences, it was unable to get the money to do the work and had to shelve the projects.
This finance problem gets more and more acute the smaller the company is. The people I was talking to said they knew of several small firms with exciting new technologies, but were unable to raise the money to exploit them.
A second big problem is the fluctuating oil price. This seems surprising, because surely the oil industry – long used to boom and bust in crude oil prices – ought to be equipped to deal with these ups and downs. But apparently not everybody is. One accountant who deals with the sector spoke rather caustically of seeing businesses which needed help but were unable to produce a basic 60-day cashflow forecast.
But the other half of the sample were not so affected. These companies tended to have product lines that were more or less constantly in demand – not least because they offered cost and time savings and the firms were diversified with some recession-proof products.
The big common factor among all the successful firms, however, was that they had worked hard on their business basics, such as understanding what customers wanted and being able to respond rapidly to changes in demand.
While it is reassuring to know that there are plenty of oil and gas firms weathering the recession well, it is troubling to know that there are as many who are not. It is especially worrying that the difficulty is at the smaller end of the size spectrum, because these firms have the remaining future of the North Sea industry in their hands.
North Sea oil production has been in decline since 1999 and the big oil majors are moving out to lower-cost areas elsewhere. This is underlined by news this week that BP has found an oilfield as big as the North Sea Forties field (which it sold in 2003 to Apache Corporation) in the Gulf of Mexico.
Estimates of what is left in the Forties field vary from 20 billion to 35 billion barrels, which is a lot considering that 38 billion barrels have already been sucked out. But the high costs of the North Sea, the small size of the reserves, plus the shortage of capital available to firms to get at what remains, indicate the future is not an assured one.
Work by Alex Kemp, professor of petroleum economics at Aberdeen University, also suggests that the North Sea is highly vulnerable to the crude oil price. Roughly speaking, future production at a likely $40 a barrel is half what it should be.
This poses a big question to the government, for the present 50 per cent tax rate on North Sea profits may squeeze production even further.
Time I think, to consider the interesting suggestion from the industry that it should be taxed on a scale that slides up and down as the oil price varies. Otherwise, the North Sea might dry up faster than anyone thinks.
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