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BP expected to announce job cuts on its North Sea oil rigs, despite new field development

BP is expected to announce job cuts on the UK North Sea Oil rigs that it operates, despite having completed development of new wells only in December last year in the Kinnoull reservoir. The company controls the most important infrastructure in the North Sea oil fields and coupled with the recent downsizing of other operators in the area, such as Shell and Chevron, this move does not bode well for the future of North Sea oil and more broadly tight oil sources in general.

BP recently completed a major development in the Andrew field in December and this move suggests that investment in the region may have been misplaced, because oil prices were expected to remain high for the foreseeable future which would have justified the investment.

One of the main reasons for this move is that oil prices have dropped off a cliff recently going from well above $100 a barrel in July to below $50 at the start of January 2015. Energy analysts have warned that if the oil price slipped below the $40 mark operators could consider closing down wells. With prices at $50 a barrel, oil production would cost more than its value and the most at risk are the more expensive tight oil sites, which include both the UK and the US. In particular fracking for oil in the US requires a basic price of $50 a barrel to break even, so the industry understandably has begun to slow with these new prices.

Cheaper places to produce oil such as Saudi Arabia and other gulf states can secure a much better profit ratio than deep sea oil drilling, fracking and tar sands production. Because the production from a conventional oil well is much easier and cheaper to operate and develop. This means that a price drop such as this can continue to be profitable for some producers whilst putting others close to negative returns. It is rumoured that this is a deliberate ploy in order to gain market share by Saudi Arabia as it has continued to release oil onto the market despite the drop in prices which combined with the USA now exporting oil has led to a flood.

Meanwhile UK energy ministers are meeting with BP in order to try to reverse this decision as the North Sea is a major asset for the UK and they suggest that reducing production based on a short term price drop is too reactionary.

For more information on the oil industry please read our case study:

Peak Oil: The nightmare scenario of the oil drying up, could be close

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