Oil price destroys viability of Scottish independence

The Scottish National Party (SNP) once had budgeted on the basis of oil price being $115/ barrel. Then at the time of the referendum they assumed a price of not less than $100/barrel giving a tax revenue of not less than £7 billion per year which would offset the “subsidy” that Scotland gets from the rest of the UK of about £9 billion per year. This tax revenue drops to zero with a North Sea oil price of less than $50/ barrel.  But the breakeven price for oil producers is even higher:

Forbes (Jan 2015)Some prospects, including almost all activity West of Shetlands, are considered unprofitable below $100 per barrel. Mature oil wells struggle to be viable below $60, so BP has decided that 200 jobs and 100 contractors’ roles would go following a review of its North Sea operations managed out of Aberdeen, Europe’s oil and gas capital. Looking ahead, BP forecasts the oil price to remain in the $50 to $60 price range for next three years. ………

Either way, BP’s take has darkened the mood in the British and Norwegian sectors of the North Sea. However, it isn’t the first to announce job cuts. If anything, BP’s move is pretty predictable given the company has been quite clear about reducing employee headcount.

Shell, Statoil and Chevron have made similar announcements while ConocoPhillips has also been clear about a need to “streamline operations.” As operators downsize, oilfield services companies would invariably feel the pinch from independent upstarts to market leader Schlumberger.

But reality is biting hard. It is now more likely that Brent oil price will be trapped between $30 and $40 for the next 2 -3 years. Costs of production in the North Sea have not come down much compared to the sharp decline in US production costs of oil from fracking. And now Iranian oil will take its market share. At these prices the North Sea oil producers will be losing money on each barrel produced. Production is likely to be scaled down sharply and investment will drop to a trickle. Onshore jobs involved in both exploration and production (Norway, Holland, Scotland) must decrease. The Norwegian and Scottish production will bear the brunt of this turndown. Norway has built up a huge reserve fund and can weather a storm but not a permanent downturn, The UK economy can take the hit but an independent Scotland would be very hard hit. The introduction of shale fracking in England – which could take advantage of the the production cost reductions achieved in the US – could not only mitigate the risk but add a new source of jobs and tax revenue. The largest cost reductions in the production of oil from shale have come in the non-unionised part of the industry. There is considerable oil shale in Scotland as well, but I expect the SNP and the UK unions to be far too short-sighted and to do their damndest to prevent the introduction of fracking.

Nasdaq brent oil 10 year chart Aug 2015

Nasdaq brent oil 10 year chart Aug 2015

At less than $40/barrel, the SNP would need to create some very strange, fantasy budgets to prove the viability of an independent Scotland. Perhaps they could just nationalise everything and print money.

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