FOLLOWING the slump in the oil price, companies affected by the price of crude oil have faltered as a result, writes Oliver York at wealth management firm, Brewin Dolphin in Newcastle.

None more so than the North Sea Oil industry, which has been hit hard since the oil price plunged more than 50 per cent since last June. The price drop has caused the government’s oil revenues to fall as much as 75 per cent to £168m.

So how are the North Sea Oil companies coping with the macroeconomic challenges?

It doesn’t take a top economist to realise that in order to compensate for lower prices, producers look to cut costs in other areas of the business to stay afloat. For a Labour intensive industry, this often comes in the form of cuts in jobs and pay for the thousands of employees working in the sector.

Oil company investment in the North Sea is expected to fall by up to £4 billion per year through to the end of 2018. 15 per cent of the offshore industry’s workforce, equal to 65,000 jobs, has been lost since the beginning of last year. At a time when oil production is close to becoming unprofitable for many North Sea companies, the sustainability of the industry is at risk.

Other cost-cutting strategies revolve around cutting capital expenditure, especially research into new resource fields. Costly and capital intensive, many companies are now ceasing exploration projects and focusing on existing fields to maintain their ever-tightening profit margins. Figures now show that exploration for new resources in the North Sea has fallen to its lowest level since the 1970s, with capital expenditure expected to drop by £2 to 4 billion in each of the next three years, from the current figure of £14.8 billion.

Andy Samuel, head of the UK’s Oil and Gas Authority (OGA), warned of a possible ‘domino effect’, with firms looking set to leave the area in order to save costs or focus production on other regions proven to be more profitable. As some fields share the costs of pipeline maintenance and plant operations, it will become challenging for those left behind to maintain the region’s infrastructure and continue to stay profitable.

Despite a pledge from the UK government to reduce taxation in the industry, many view the move as too little, too late. The world’s top energy firms have delayed £200 billion in spending across the globe, by postponing 46 major oil and gas projects. It is, however, in the Government’s best interest to keep North Sea oil afloat, as the region provides the UK with more than a third of the UK’s energy and contributes an estimated £39 billion in revenue.

According to the OGA, there are still 23 billion barrels of oil to be recovered from the North Sea. A question on many minds is whether there will be any companies left around to extract the oil, with industry bodies estimating it only has a few decades remaining.