UK finance minister George Osborne might consider taking Shell off his Christmas card list this year.
The firm is axing 250 staff and contractors from its UK North Sea business, on top of the 250 job cuts it announced in August last year. Not only that. Shell is proposing that its offshore workers change their shift patterns to “three weeks on, three weeks off” from the traditional North Sea model of “two weeks on, three weeks off”.
Others — including US firms Apache and Marathon — are looking at doing the same, although the proposal has been met with scorn from unions and could ultimately trigger strike action.
The timing is unfortunate for Osborne, especially as his government has made job creation a central pillar of its election campaign. But Shell can hardly be accused of dropping a bombshell.
Profitability in the North Sea has long been constrained by declining production, ageing platforms and high costs. The region offered slim pickings long before oil prices started to fall. “At $115/bl, you weren’t making that much money,” BP chief financial officer Brian Gilvary says.
Chevron announced 225 North Sea job losses back in the halcyon days of July 2014, when Brent crude averaged over $105/bl. A 50pc plunge in oil prices since then has added fuel to the fire.
BP, US firm ConocoPhillips, Canada’s Talisman and Abu Dhabi’s state-controlled Taqa have all joined Shell and Chevron in wielding the axe. And they’re unlikely to be the last. Industry veteran Ian Wood — whose recommendations on maximising recovery in the North Sea have been adopted by the government — warned late last year that as many as 15,000 jobs could be lost in the North Sea oil and gas industry before the end of the summer.
Shell has offered Osborne some crumbs of comfort. “Reforms to the fiscal regime announced in the budget are a step in the right direction,” it says. But no-one in the industry is under any illusion that tax cuts offer any kind of silver bullet. Improving fiscal terms “is not going to change this overnight”, BP chief executive Bob Dudley says. “The cost structure will have to come down as well.”
Industry body Oil and Gas UK agrees. It estimates that one-fifth of UK production is uneconomic at $50/bl. And it’s not just mature fields that are struggling. Athena, which started up in 2012, is among those not generating enough revenue to cover costs.
Operators are banking on falling rig and equipment costs to help restore profitability. But cost deflation in the supply chain may not be enough. Osborne knows that Shell’s announcement today is probably not the end of the cull. But he’ll be hoping that others save their bad news until after the election.
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