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Dying industry
Image: Walt Jabsco

The last act of a dying industry

Within any country’s economy are several critical industries that are considered “strategic.”  In 19th century Britain, for example, coal, steel and shipbuilding were deemed to be essential.  Even today, the ability to construct military vessels is, at least to a limited extent, considered strategic.  Steel has a less obvious position.  While no longer essential, strategic concerns were raised last year when Tata Steel threatened to close the Port Talbot works.  In Britain, coal, quite clearly, is no longer considered a strategic resource.

Each of these former or diminished strategic industries followed a four stage life-cycle:

  • A profitable stage in which private companies could operate without depending on government support
  • A decline stage in which unprofitable sectors were closed and production refocussed
  • A nationalised stage in which the industry could only operate either through government subsidy or full-scale nationalisation
  • A decommissioning stage in which the industry is run down, but unemployment is partially masked by temporary jobs scrapping plant and renovating the environment.

Of course, these stages are not wholly sequential.  Public support often goes alongside shrinking and refocussing an industry.  Similarly, some decommissioning occurs even as government attempts to shore up an industry.  Nor, necessarily, does an industry have to disappear entirely at the end of the process.  For example, South Wales still has an open cast coal mine and a handful of small deep mines in the private sector 32 years after Margaret Thatcher defeated the miners.

Oil is another strategic industry that is now entering its final stages.  From the heady 1980s when black gold flowed from the North Sea, funding Britain’s low-tax economy and underwriting its financial sector, oil (and gas) production peaked in 1999 and has shrunk by 60 percent since then.  The big energy corporations have largely sold out, leaving smaller, second-tier companies to eke out most of what remains profitable.  Indeed, some of the infrastructure is already being decommissioned, and there are growing concerns about who is going to pick up the decommissioning tab as profits turn into losses.

While the UK oil industry is far from finished, we have finally reached the nationalisation phase.  As Simon Evans at Carbon Brief reports:

“The North Sea oil and gas sector became a net drain on the UK’s public finances for the first time in 2016… In total, the sector received £396m in 2016, net of tax payments. This is the first year that the North Sea industry has cost the exchequer more than it has contributed.”

This is unlikely to turn around.  The lesson of the downturn in oil prices since 2014 is that the global economy simply cannot support the kind of oil price increases that would make the UK oil industry as a whole profitable.  So, while there may still be a handful of relatively small fields that can turn a profit at $50 per barrel, it is likely that much of what remains will continue to need tax rebates, subsidies and grants from the UK government if it is to stay in business.

This, however, casts serious doubts about the decommissioning process.  As Evans notes:

“Now, some of the largest fields are coming to the end of their life. The rigs, pipelines and other infrastructure built to exploit them must be safely decommissioned. Cleaning up this legacy will cost an estimated £47bn out to 2050, according to the UK’s Oil and Gas Authority (OGA)…

“Meanwhile, estimates of the total cost of decommissioning are highly uncertain, with the OGA giving a range of plus or minus 40% on its £47bn figure. One 2016 study said taxpayers could face a £75bn bill. Other studies have speculated that the costs could wipe out all future North Sea tax revenues, potentially damaging the economic case for Scottish independence. As the Financial Times noted in January, the North Sea industry ‘risks becoming a net drain on UK resources as it enters its sunset years’.”

This leaves the UK government between a rock and a hard place.  It can leave it to market forces and let the industry go bust.  If it does so, it will be stuck with the decommissioning bill, and it will be even more dependent upon imported oil and gas.  It can restructure and scale back in an attempt to maintain profitability – perhaps by forcing UK taxpayers to bridge the ‘Goldilocks Gap’ – in the hope that some of the decommissioning cost will be met by a declining industry.  Alternatively, it can – and probably will – do what governments around the world are in the habit of doing in the face of a major predicament; and hope that the other party is elected before the proverbial hits the fan.

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