Oil price rise will be good for some

Jul 30 2009 by Peter Jackson, The Journal

WE ARE thankfully well past the “don’t mention the R-word” phase. Now everybody admits that the recession is an elephant fairly and squarely in the room.

It is here and it’s affecting many of the sectors that are important to the North East economy, including offshore. When global economic activity slows, so does the demand for energy and this means lower prices and less investment.

We have seen a fall in oil prices from a record $150 a barrel to between $60 and $70 a barrel and crude oil inventories in developed countries, both onshore and in tankers, are near record levels.

Little wonder then that this week BP announced that second-quarter profits had more than halved since a year ago, that it plans a further £1bn in cost cutting to add to the £2bn achieved in 2009 and that there have already been job cuts elsewhere in the UK’s offshore sector.

But there are some reasons for optimism. We have been seeing something of a recovery in oil prices, which have more than doubled from the $30 lows at the start of this year.

Also, when the North Sea Oil fields Brenda, Nicol and Shelley were recently offered for sale, they were snapped up by Premier Oil.

It is significant that Premier’s investors fully underwrote the rights issue to fund the purchase and banks were happy to extend the necessary loans, so some clearly see the potential for future returns in offshore.

Furthermore, according to US Investment Bank Goldman Sachs, oil prices could reach $85 a barrel by the end of the year and $95 a barrel by the end of 2010. This is supported by Opec, which is talking of demand for oil picking up in the US, China, India and Asia as a whole and of this activity driving prices of between $75 and $80.

There is also pressure in the US from a newly powerful environmental lobby to place restrictions on the oil industry that could limit production.

So, while it may not be good news for the motorist, or for other industrial sectors which could do without higher fuel prices, or for UK government revenues which depend on oil prices, there may be relief in sight for the offshore industry.

Peter Jackson is a writer and former business editor of The Journal – p.jackson77@btinternet.com