HAVE you noticed what is happening to the price of oil? In mid-June, the benchmark North Sea crude, Brent, was trading at $115 a barrel. Now, less than four months later, it is struggling to stay above $90. As I write it’s a shade under $91, down by more than one per cent in the past twenty four hours alone.
In my view a commodity price fall of more than a fifth in less than four months spells volatility with a capital V. Had I said as much in the run-up to last month’s referendum, I’d doubtless have had the Sir Ian Wood treatment, roundly condemned, whatever my experience, for daring to question the Scottish government’s determinedly-upbeat view of the scale and potential of the remaining hydrocarbon bounty off our shores.
I refuse to be caricatured as another lackey of Project Fear. Now the vote on Scotland’s constitutional future is decided, can we please focus on what really matters? Project Reality, I’d call it. And make a determined effort – our government in Edinburgh included – to better understand the complexities of the myriad forces that are shaping our everyday lives and how best to respond to them.
Oil, thanks to its continuing significance in the Scottish economy and its importance as a fuel and feedstock in all our lives, is certainly one of those forces. Some, in the arts and in higher education – the University of Glasgow the latest – wish to disengage from any fossil fuel future, at least in terms of sponsorship and investment strategies. Our Scottish government shows no such inclination. It still insists it can ride both its green and black energy horses.
North Sea resilience remains central to its vision of independence. But that resilience is hugely dependent on global oil prices staying high. So the sharp falls in the price of Brent crude, which have accelerated since we all voted on September 18, will be very unwelcome. Already there have been press reports, both here and in Australia, that the third biggest player in the North Sea, the US independent operator Apache Corporation, is putting its North Sea assets up for sale.
Since Apache controls the North Sea’s oldest field, Forties, bought from BP in 2003, and Beryl, bought from Exxon in 2011, any exit now would be disastrous. The leading player in reviving the sector since the turn of the century – squeezing, in the process, a lot more oil out of the Forties field than BP ever could – would, in effect, be concluding: ‘Where we think the oil price is now heading, even we can’t make serious money out of a comparatively high-cost province like the North Sea.’
Apache took control of Forties as the oil price began to take off, hitting an all-time peak of $141 a barrel in June 2008. When, after the great crash, it acquired Beryl, the oil price was again surging north of $100 and staying there. What if, thanks to global over-supply and flagging demand across much of the world, the oil price is now destined to plumb the much-lower price levels last seen throughout the 1990s?
How might that happen? The most dramatic development in the global oil and gas market in recent years has been the fracking revolution in the United States. Producing oil and gas cheaply from widespread shale deposits there has turned America into a hydrocarbon exporter again. The United States is poised before the year is out to leapfrog Russia and Saudi Arabia as the world’s number one producer.
The loss of a lucrative hydrocarbon export trade to the US has huge consequences for the rest of the industry worldwide. With America increasingly self-sufficient, other producing countries have been forced to find new markets for the oil and gas they produce. That scramble for customers is one of the factors behind recent price falls. Even Saudi Arabia has been forced to cut its benchmark selling prices in recent days.
We can see evidence of this ongoing market turmoil right here in Scotland, right now. Ineos, owners of the petrochemical complex at Grangemouth, is already embarked on a major investment programme to ship in to the River Forth liquified fracked gas from the United States as feedstock for its ethylene process. It is doing the same thing in Norway.
The mere fact that that American gas is plentiful enough and cheap enough to make building such a transatlantic supply line a profitable proposition speaks volumes about the emerging competitive challenges facing higher cost provinces like the North Sea.
These stark new realities are also impacting on the strategic thinking of oil and gas corporations in the United States, like Houston-based Apache. In June last year Apache’s CEO Steven Farris told the Financial Times his group had “flipped” its priorities. The old approach had been to keep its US operations on an “even” keel, while pursuing future growth internationally, in provinces like the North Sea.
Now the fracking revolution at home and pressure from its mainly-American shareholders to cut its debts have changed all that. Apache now wants its international operations to “generate cash” to help fund further development of its new “growth core”, its onshore oilfields in its drilling heartlands of Texas and Oklahoma. Other American oil companies are making similar strategic switches.
This week Apache’s CEO said his company is still evaluating “the separation of its international business through capital markets or strategic transactions”. It has already sold a one-third stake in its Egyptian oilfields to a Chinese partner, Sinopec. So Mr Farris appears to be signalling either a stock market floatation of its other international operations, including its North Sea operations, or selling specific offshore assets if buyers for them can be found and the price is right.
No one can say, with any degree of certainty, where the oil price will head next. But the pressures on the down side – not just from the impact of the American fracking revolution, but also from the faltering prospects for continued economic recovery around the world – appear formidable and not easily shaken off.
Add to these the ongoing challenges of a mature province like the North Sea where, as one recent assessment put it, “remaining accumulations (are) increasingly commercially marginal even at current oil prices”.* Any realistic assessment of the North Sea’s future prospects falls a very long way short of the rose-tinted picture painted by the Yes campaign in recent years.
*This assessment was made by a Scottish-based oil and gas consultancy, Hannon Westwood, with twenty years experience of providing intellegence on prospects in the UK Continental Shelf. Its two principals Charles Westwood and Jim Hannon have personal experience of the industry of even longer standing. You can read the short assessment they issued on September 16, two days before the referendum vote, at a time when the oil price was still close to $100 here
Alf Young has been a journalist specialising in industral and economic issues in Scotland for the past 35 years