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Sinking feeling: Scotland struggles as oil price plunges

As the price of oil continues to fall, the fallout is starting to make itself felt within the industry and those dependent on it. Nowhere more so than in Scotland's north-east, as Peter Geoghan reports from Aberdeen.

Aberdeen, in the northeast of Scotland, looks like a city on the up. Cranes pepper the skyline of this once quiet fishing town. Expensive four-wheel drives cruise past imposing granite buildings on the city's mile-long main street. Apple and Hugo Boss are among the designer stores in the new, sleek glass-fronted shopping center.

But appearances can be deceptive. Aberdeen, and Scotland's north-east, have enjoyed a lengthy boom thanks to the off shore oil and gas industry in the North Sea, but fears are growing that tumbling oil prices could hit the region hard.

North Sea oil and gas accounts directly and indirectly for some 450,000 jobs in the UK, with half of those in Scotland.

As oil has slumped to below $50 a barrel, industry association Oil and Gas UK has warned that as many as 35,000 jobs may be lost in the North Sea. Earlier this month, energy giant BP announced plans to shed 200 onshore staff, while 100 contractors' posts will also be axed.

Tax relief

Much of the North Sea is unprofitable when the oil price is less than $60 a barrel. As a result at least half a dozen exploration projects have been abandoned in recent weeks.

In December, the UK government reacted to falling oil revenues by announcing a 2 percent cut in the tax rate paid by oil and gas companies, but leading oil economists say more is needed to encourage investment.

"Companies really need significant tax relief to stop investment from falling," says Alex Kemp, professor of petroleum economics at Aberdeen university. Investment in training and research is key to the oil and gas industry's survival in Scotland, says Kemp.

"There is a need to ensure that we still train young people. Also, there should be investment in research and development, which has been relatively low for 20 years."

Dirty business

The North Sea oil and gas industry's travails could have ramifications beyond the north-east of Scotland, too.

The amount of tax that the Treasury makes from North Sea oil and gas is expected to be significantly down this year as costs for companies rise and production decreases. Oil and gas UK have predicted that investment, which peaked at £14.4 billion (19 billion euros) in 2013, could halve by 2016.

Mark Carney, the governor of the Bank of England, has said that falling oil prices could benefit the rest of the UK economy and offset job losses in the North Sea. "It is a negative shock to the Scottish economy, but it is a negative shock substantially mitigated by the fiscal arrangements in the UK," Mr Carney said.

But many involved in Aberdeen's oil and gas industry disagree.

Alex Russell, professor of petroleum accounting at Robert Gordon University in Aberdeen says the economic problems created by cutbacks in the North Sea would far outweigh any positive impact on the wider UK economy from falling oil prices.

The UK government and oil and gas companies need to reinvest some of the huge profits they have made in the past back into the North Sea, says Russell. "The oil companies need to pay back some of the billions that they have taken out of the North Sea. The UK government needs to pay back some of the billions they have taken out of the North Sea. They need to reinvest in exploration to keep the North Sea going."

Fears are growing that without fresh investment in the North Sea decommissioning could begin effectively spelling the end for the industry.

Will it bounce back?

"The oil price will rise again. There is no question of that. The problem is if the price doesn't rise quickly then decommissioning will start in the North Sea and that's a nightmare for both the government and the North Sea industry," says professor Russell.

There is a political dimension, too, to the North Sea's current difficulties. Unionists have accused the Scottish National Party, which narrowly lost last year's independence vote and is now in power in the devolved parliament in Edinburgh, of failing to see the oil crisis coming. Scottish Conservative leader Ruth Davidson has said that Scotland, if independent, would face a budget shortfall of £18.6 billion as a result of falling oil prices. Scottish nationalists' economic forecasts at the time were based on an average oil price of $113 a barrel, more than double its current level.

British Prime Minister David Cameron has said that only the "broad shoulders" of the United Kingdom could bear the burden of falling oil prices. But Scottish Nationalists have accused the UK government in Westminster of mismanaging the North Sea oil and gas industry, pointing to a series of tax hikes in recent years and the suppression of a 1974 Westminster report that predicted that Scotland would become "as rich as Switzerland" if it had control of North Sea oil. The "McCrone report," named after the economist who penned it, resurfaced last year during the independence debate.

"The gross mismanagement of Scotland's North Sea oil bounty by successive UK governments has left this country more vulnerable in the face of collapsing oil prices than it otherwise ought to have been," says Scottish newspaper columnist Kevin McKenna.

Houston, we have a problem

Earlier this month, Scottish First Minister Nicola Sturgeon unveiled new measures aimed at addressing concerns about the North Sea oil and gas industry.

Speaking on a visit to Aberdeen, she announced the establishment of a new energy jobs taskforce as well as incentives for employers to take on apprentices in the oil and gas industry facing redundancy.

But on the streets of Aberdeen, the interest is not in politics but on what can be done to save jobs in the North Sea.

"There is too much politicking. All eyes are on [the UK General Election in May] but to save jobs we need something to happen quick," says union representative Jake Molloy, regional organizer for the Rail, Maritime and Transport Workers Union (RMT).

"If we don't incentivize maintenance programmes and keep the old hub installations running we are going to get to a point - and that point will be soon - where somebody in Houston will lift the red pen, draw a line and that'll be the oil and gas industry finished."

- Jess Potts
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