Oil swoon hits Scotland's city of millionaires

Oil and gas deposits in the North Sea have helped turn Aberdeen, a former fishing town in northeastern Scotland, into one of the richest cities in Britain over the past 40 years. The city boasts the highest concentration of millionaires in the country. The unemployment rate is low and salaries are far higher than the national average. 

But Aberdeen’s rapid growth could soon come to an end amid plunging oil prices. As the global price of crude continues its precipitous drop – most recently hitting a six-year low – developers have abandoned at least a half-dozen exploration projects in recent weeks. Meanwhile, lawmakers have struggled to prevent the city from falling into an economic tailspin.

The situation is “rapidly turning into a serious crisis," says Jake Molloy, an organizer with the Rail, Maritime, and Transport union in northeastern Scotland.

The North Sea oil and gas industry accounts for some 450,000 jobs in Britain, half of which are in Scotland. Oil and Gas UK, a trade group, has warned that as many as 35,000 jobs may be lost on the oil rigs off Scotland’s northeastern coast and in tertiary industries onshore.

Contractors who work offshore have seen their rates cut by as much as 20 percent, while major industry players such as BP have announced hundreds of job losses in their Aberdeen headquarters.

A citywide struggle 

The downturn is not just being felt in the oil and gas industry. Notoriously high hotel prices in Aberdeen have tumbled. Owners of newly built hotels worry how they’ll fill rooms as companies look to cut costs. Bars and restaurants in the city are quieter than in the past.

“These are tough times. No doubt about it,” says an oil worker in Aberdeen, who asked to remain anonymous for fear of repercussions from the publicity-shy industry. “The situation has changed so quickly. Six months things were looking good, and now it is the opposite.”

The oil worker says employers have even implemented a pay freeze, the first he’s seen in more than a decade in the industry.

Despite the slowdown, Aberdeen remains among the most expensive cities in Britain. Dave Simmers, the chief executive of Community Food Initiatives North East (CFINE), says he has seen more and more people struggling to afford daily necessities over the past year.

Mr. Simmers runs a food bank near Aberdeen’s docks. While few if any of the people coming for packages of dried pasta and shelf-stable milk work in the North Sea, the oil and gas industry’s struggles are hampering his ability to help those in need. CFINE makes some 85 percent of its revenue from selling fresh produce and other foods to oil and gas companies. But orders are down, including the cancellation of a £7,000 ($10,300) monthly purchase from one firm.

“Companies are cutting back on costs they don’t need to incur. It is tough at the moment,” Simmers says. “It is not just jobs lost in the industry; it is the knock-on effect.”

Calls for investment

Many involved in the North Sea have called on the British government to provide tax breaks to encourage continued exploration and drilling. A recent report warned that annual investment in the industry could fall to £2.5 billion ($3.7 billion) within three years, after hitting a record high of £14.4 billion ($21.2 billion) in 2013. 

In December, the British government cut the tax rate on oil and gas companies operating in the North Sea from 32 percent to 30 percent. But many in the industry argued it was far from enough. They're anxiously waiting to hear what if any additional cuts are included in Britain's proposed budget for 2015 when Chancellor of the Exchequer George Osborne delivers it to Parliament today.

“Companies really need significant tax relief to stop investment from falling,” says Alex Kemp, a professor of petroleum economics at Aberdeen University, adding that spending on research and development has been relatively low for 20 years. He says investment in education and training is also key to the survival of Scotland’s oil and gas industry.

Alex Russell, a professor of petroleum accounting at Robert Gordon University in Aberdeen, urges both the government and oil companies to “reinvest in exploration to keep the North Sea going.”

Scotland’s coal and steel industries once employed hundreds of thousands of people. Now they are rusting relics of a bygone age. Mr. Molloy, the union organizer, fears that without fresh investment North Sea oil and gas – and Aberdeen, the city built on the industry’s profits – could face a similar fate.

“If we don’t incentivize maintenance programs 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,” he says.