Mark Williamson: North Sea jobs cull looms after blockbuster oil and gas deals

Oil majors Shell and Equinor stunned the industry by unveiling plans to combine their North Sea operations to create what they claimed would be the largest independent operating in the area.  

The new venture will produce around 140,000 barrels of oil equivalent daily. It will leapfrog over the business created in October after Ithaca Energy acquired the bulk of the North Sea portfolio amassed by Italian giant Eni.

The deals followed warnings from sector leaders that the series of tax increases imposed on oil and gas firms since the windfall Energy Profits Levy was introduced in 2022 could spark an exodus from the area.

Labour chancellor Rachel Reeves increased the rate of the EPL and extended the term by a year to 2030 in the Budget in October.

READ MORE: Huge Shetland oil field in limbo after Budget tax hike

Against that backdrop the deals agreed by the four firms could be seen as providing an unexpected vote of confidence in the North Sea.

Rather than selling up, the firms concerned have underlined their long-term commitment to the area.

Shell produces much more oil and gas in the North Sea than Equinor. It is effectively swapping stakes in fields that are in production for an interest in the controversial Rosebank development that the Norwegian firm is leading off Shetland.

Equinor is developing Rosebank with Israeli-owned Ithaca. The firms hope to start production in 2026 or 2027 but the timetable could be disrupted. The Court of Session in Edinburgh is considering a claim by campaigners that the Conservative Government was wrong to approve Rosebank because the assessment process failed to consider the emissions that would result from use of the oil and gas held in the field.

READ MORE: Rosebank oil field firm shrugs off Scottish court challenge

Gail Anderson at the Wood Mackenzie energy consultancy noted that the deal between Shell and Equinor could pave the way to other developments as both firms acquired exploration acreage West of Shetland in the latest licensing round.

The deal partly reflects the fact that the tax regime in place in the North Sea has been very favourable to oil and gas firms for years.

Ms Anderson noted that the enlarged venture would be able to utilise losses accumulated by Equinor to reduce its tax bills. The losses resulted from the hefty investment that Equinor made in developing assets such as the Mariner field off Shetland.

The Labour Government left the reliefs concerned in place in the Budget although it axed the generous investment allowance that was introduced alongside the windfall tax in 2022.

Ms Anderson concluded: “The UK is still attractive for some companies, and this deal will provide greater certainty for long-term investment on the UKCS [United Kingdom Continental Shelf].”

READ MORE: £500m SNP Government fund farce hangs over Scottish Budget

The value of the reliefs available for tax losses was underlined last week when the consolidation process continued, albeit on a smaller scale.

North Sea-focused Serica Energy acquired Parkmead Group’s assets off the UK for an initial £5m.

Serica noted that the acquisition would allow it to utilise around £400m tax losses and investment allowances accumulated by Parkmead.

Serica expects to generate plenty of cash from its North Sea operations even if the headline rate of tax payable by firms increased to 78% following the Budget, from 75%.

However, Shell and Equinor made clear that the response to the Budget will include cost cutting moves that are likely to take a toll on jobs. Noting that they had agreed their deal in response to the challenges that firms faced operating in the mature North Sea, the firms said: “The new company will be more agile, focused, cost-competitive”.

The merger will create opportunities to cut jobs in areas of overlap between the two organisations. Shell’s UK oil and gas business employs 1,000 while Equinor’s employs around 300.

Shell cut hundreds of jobs in Aberdeen following the £47bn acquisition of BG in 2015. BG combined significant North Sea operations with attractive assets off Brazil.

Shell employed around 2,000 people in Aberdeen at the time while BG had 300.

READ MORE: Scottish wind energy drive faces hit from Labour Government move

Jobs were already at risk at Shell before the Equinor deal under chief executive Wael Sawan’s drive to simplify the business. This will involve digitising work.

Harbour Energy cut more than 300 jobs in Aberdeen months after acquiring Premier Oil. The cuts were described as a response to the introduction of the windfall tax but analysts had expected them to be made before the levy was imposed.

The consolidation process will increase pressure on the supply chain as groups use their increased scale to squeeze concessions from suppliers.

The prospect of more oil and gas job cuts comes as the Labour Government launches a push to make Britain energy secure by 2030 with clean power.

On Friday energy secretary Ed Miliband claimed the Government would secure the backing required to invest £40bn a year in the development of renewable energy generating capacity and related infrastructure.

He said the drive would create “good jobs across the country including engineers, welders and mechanics”.  

The new Great British Energy operation which the Government has said will be based in Aberdeen is expected to play an important part in the clean energy drive.

But Mr Miliband’s boast will not impress those who have got used to ministers in Scotland over-promising and under-delivering in terms of green jobs.

Last week the Just Transition Commission warned that Scotland was at risk of going backwards in its efforts to reduce reliance on fossil fuel without damaging communities that rely on the industry.

READ MORE: Scotland’s green jobs failure seen in English city’s success

The Holyrood Parliament has waited months for the SNP Government to publish the promised revamp of the £500m just transition programme it launched in 2021.

SNP Governments have taken it for granted that firms would want to develop lots of windfarms off Scotland and that the work concerned would create huge numbers of jobs. The benefits of windfarms developed to date, however, have largely been enjoyed by firms based outside Scotland.

Ministers on both sides of the border will now have to grapple with the fact that giants such as Shell are losing interest in offshore wind.

Shell and BP bid enthusiastically for acreage in the ScotWind leasing round that was completed in 2022. They thought the expertise they had developed operating oil and gas fields offshore would fuel success in the windfarm business.

However, following leadership changes at both groups, the mood music has changed.

Shell’s Mr Sawan raised questions about the economics of offshore wind after costs surged.

Earlier this month Reuters reported that Shell had told employees the firm is stepping back from new offshore wind developments.

BP boss Murray Auchincloss has said the group will sharpen its focus on oil and gas. Last week BP announced a deal to merge its wind interests with Japan’s Jera. The venture will focus on existing projects in North-West Europe, Australia and Japan but aim to limit the amount of investment BP is required to make.

If ministers want to persuade oil firms to have another rethink they may have to guarantee that giants can achieve returns that would result in UK householders facing increases in energy bills that many people are already struggling to afford.