Hard times for Aberdeen as oil price slump hits home

The boom in the former ‘oil capital of Europe’ has come to a shuddering halt

 

On paper, Aberdeen is one of the UK’s richest cities, with only London having more millionaires per capita. House prices are well above the British average and expensive cars cruise down the city’s grey, granite streets.

But beneath the surface, Aberdeen’s long boom has come to a shuddering halt. The discovery of North Sea oil in the 1970s transformed this one-time fishing town on Scotland’s northeast coast. Now, with a barrel of crude retailing at under $50, the former “oil capital of Europe” is struggling.

The UK Government Expenditure and Revenue Scotland (GERS) figures from last Wednesday estimated that the takings from the North Sea fell from £9.6 billion in 2011-12 to just £60 million last year. An estimated 100,000 people have lost jobs in the lengthy oil and gas supply chain with more redundancies expected.

Paul Wheelhouse, the Scottish National Party (SNP) minister for business, innovation and energy, has said the Scottish economy faces “substantial challenges” as a result of lower oil prices.

Many of the upmarket restaurants that catered for the well-heeled oil and gas industry have shut their doors. Former customers now queue for packets of rice and fresh fruit at the plethora of food banks that have sprung up across the Granite City.

“You have a situation where white-collar workers are turning to food banks,” says Rick Brooks from the Trussell Trust food bank in Aberdeen. “People are basically giving away their cars because they cannot afford to run them.

“Two years ago you couldn’t find white-collar workers using a food bank; now 50 per cent of new users in the last six months are white-collar workers who were administrative staff or above.”

Global crash

The global oil crash, which was largely attributed to a price war being waged by Saudi Arabia against the US shale industry, has seen seen profits in the North Sea nosedive since 2014.

Although production remains high, exploration drilling is at levels last seen in the 1960s, before the North Sea was a major oil producer. Now “efficiency” is the watchword. Operating costs have dropped from more than $30 a barrel to almost half that but cannot compete with barely a dollar in Saudi Arabia.

“The North Sea was high cost by international standards anyway,” says Alex Kemp, professor of petroleum economics at Aberdeen University. “At the current prices quite a lot of fields are showing losses.”

Kemp, a leading expert on the North Sea oil economy, predicts tough times ahead for the industry, at least in the short term.

“Our modelling is suggesting that the rest of the year will be quite tough and there could be more redundancies,” says Kemp. “The only bright spot is that [the North Sea] is very completive internationally.”

Cost reductions have largely come from massive cuts to once lucrative salaries. Falling wages have had a big impact on Aberdeen’s economy.

House prices, which rose by 17 per cent in 2013, have fallen sharply in the last year, according to a report from Aberdeen Solicitors’ Property Centre. The city’s population has declined by 15 per cent since the crash with the majority of students and young professionals in Aberdeen considering leaving the city in the next few years, according to a recent PwC report.

“We anticipated cuts and a pretty severe downturn, but I don’t think anyone anticipated what we are currently going through. I don’t know when we will come out of it,” says Jake Molloy, an organiser for the Rail Maritime and Transport (RMT) union. Offshore strikes, the first in more than 20 years, took place recently over pay and conditions.

“Morale is very low,” says Molloy, himself a veteran of the huge platforms that sit hundreds of miles off Aberdeen’s rugged coast. A bronze scale model of the Piper Alpha glints in the sun in the window of the RMT’s Aberdeen office: the rig was destroyed in an explosion that killed 167 people in 1988. Molloy says concerns about safety are growing as budgets are slashed.

Many oil companies are increasingly relying on cheaper foreign labour to service their offshore platforms.

“The oil companies have reduced costs but to do that they have brought in Filipino, Indian, Malaysian crews on around £2 an hour,” says Molloy. In the largely unregulated offshore world, these workers are not subject to minimal immigration restrictions.

Little hope

The downturn in the global oil economy has affected almost every aspect of life in Aberdeen. Hotel rooms were once so hard to come by that offshore workers were put up in Edinburgh, more than 100 miles away. Now, newly built hotels stand practically empty.

“What we are experiencing now is here to stay,” says Stewart Spence, owner of the five-star Marcliffe Hotel. “When we had $100 oil we had 100 per cent occupancy. Now we have $40, $50, we have 40, 50 per cent occupancy. That’s what we have to live with for the future.”

Earlier this year, New Yorker Stephen Dillon closed his steakhouse Prime Cuts after a decade in business. Midweek sales had fallen by about 70 per cent. Dillon and his French wife, Pascaline, opened a new barbecue restaurant but have little hope for the future.

“All of the fine dining establishments in Aberdeen have been hit really hard by the oil crisis,” says father-of two Dillon. “Last year cost me about £40,000. I was able to absorb that. Since January we’ve fallen off the plank.”

The UK’s recent Brexit vote has increased uncertainty for North Sea oil and gas – and for Aberdeen. The city has often looked to the EU and its near neighbour, Norway, says Barney Crockett, a councillor in the Labour administration that sits in Aberdeen’s 1960s-era city chambers.

“We often feel we don’t get a fair look from Scottish or British governments so Europe has been really important,” says Crockett, pointing to the city’s hydrogen bus fleet, which is part-funded by the EU. “Brexit means we need to work harder on our links with Europe.”

The downturn in the North Sea could have political as well as economic implications. The Scottish National Party’s prospectus for independence in 2014 was based on prices more than $100 a barrel. With oil currently wholesaling for less than half that, the prospect of a second referendum appears to be receding, despite Scottish first minster Nicola Sturgeon saying another vote on leaving the UK was “highly likely”.

The immediate question in Aberdeen is how to turn the city’s fortunes around. “You can’t just abandon a city of 200,000 because even those people not working directly in oil and gas are affected. What else should politicians be tackling, if not this?” says Lynn Bennie, professor of politics at the University of Aberdeen.

Just a few feet from the city’s windswept docks, the Aberdeen Food Bank Partnership warehouse is filled with plastic bags stocked with dried food. Business has been brisk. By the end of 2015, chief executive Dave Simmers was dispensing about 750 food parcels a month. Now that figure is 1,200.

Many of those coming for help used to work in the North Sea, says Simmers.

“The downturn has had a dramatic impact across the social and economic fabric of the northeast and wider: it has had an impact right across Scotland and the UK.”

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