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Terry Murden: How far can Osborne go in cutting oil taxes?

AberdeenIt sits at the heart of one of the UK’s most prosperous regions, a micro-economy that refused to allow the recession to come in. Now, though, the grim reality of economic slowdown is knocking hard at the door.

An Oil Summit, the first of its kind, was held in Aberdeen last week to discuss the potential erosion of the north east economy following the sharp fall in the oil price.

Suddenly, everyone who thought black gold would keep them in top of the range SUVs and multi-million pound luxury villas, are being forced to play catch up with the downturn experienced by the rest of Britain.

A cross-party group of politicians met industrial leaders, trade unionists and local government officials last Monday and called for a £2 billion fund underwritten by government over 20 years to help invest in vital infrastructure. But can the Chancellor afford such largesse among other pressing demands?

That Aberdeen should need any taxpayer support at all may come as a surprise to those who thought it immune to hand-outs. But the city has been vulnerable to downturns in the oil industry since the first rigs were sunk 40 years ago and transformed its economic base from one that had been built on fishing, textile mills, shipbuilding and paper making. Now another is looming.

Sadly, while oil has fuelled an above average lifestyle for thousands of locals and incomers alike, it has also become a crutch on which the city rests too uneasily, and when the economy slumps, everyone suffers because there are few other industries to pick up the slack.

Assessing how to tackle any potential crisis is hampered by the difficulty in obtaining up to date statistics. Even forecasts less than a year old are virtually worthless.

So what do we know?

Aberdeen is arguably a City-State, which means it has less in common with its immediate geography and more with those other City-States and regions that share its economic function. So Aberdeen will look less to Edinburgh, Glasgow or London and more to other oil capitals such as Houston, Moscow and Dubai.

According to the Centre for Cities Outlook 2013, five of Scotland’s top 10 businesses are based in Aberdeen with a collective turnover of around £14 billion and it has the highest business birth rate in the UK, second only to London.

It also has an unemployment rate of only 2.3%, one of the lowest rates in Scotland and well below the national UK average. Aberdeen’s employment rate is 77.9%, making it the 2nd highest UK city for people in work. Oil and gas have driven this growth and account for up to 40,000 jobs in more than 900 energy companies in the city and surrounding area.

The trouble is that in 2013 the city was still booming, unaware of the oil slump to come. In September of that year, Mark Mullin, a 24-year-old ex-Royal Navy technician, got a job at an oil company in Aberdeen believing and he was in a career for life after leaving the military.

“This is probably the one place that hasn’t been affected by the credit crunch and the lack of jobs,” he said in a newspaper interview.  “The amount of jobs up here; it’s scary to be honest. If you go on to one of the careers websites there are literally hundreds if not a couple of thousand jobs every day.

“There will always be a need for energy. In terms of pay you’ll be lucky to get anywhere near as much money as here. I don’t want to say it’s all about the money because it’s about the potential you have – you can really set up your life by working here.”

Whether or not Mr Mullin is still working in Aberdeen, he must be viewing with some concern the changing outlook, just 18 months into his new job.

Even last April a survey by Bank of Scotland said seven in 10 oil firms in Aberdeen expected to create more jobs. That was just two months before the price of Brent Crude began its sharp descent, dragging the local economy down with it and leading to warnings of a jobs crisis.

Accountancy firm Moore Stephens has seen a 42% rise in mortgages classed as risky by the Bank of England. The figures go back to 2010 but the biggest rise has been in recent months. May of these loans were taken out by those on big salaries who may now find themselves out of work.

Mid-tier accountancy firm Grant Thornton said the oil and gas slowdown was beginning to impact on a property and construction market which has been insulated from conditions elsewhere.

Lorraine Macphail, head of property and construction in Scotland for the firm said the most recent figures show the city’s industrial and office sectors again outperformed the rest of Scotland’s property market.

“The big question now is whether the tables are starting to turn. Scotland’s property and construction sector is considered to be on an upward trajectory and is showing positive signs of growth,” she said. “Are property and construction prospects in the Granite City set to go in the opposite direction just as things look up elsewhere?”

Heightened tension in property circles has focused attention on one of the most expensive properties to come on to the market and which has just found a buyer. An undisclosed offer has been made for former Scottish rally car champion Brian Lyall’s seven bedroom mansion in Aberdeen. The luxury house in one of the city’s wealthiest streets was put on the market for offers over £3.2 million last month.

It may be a sign that Aberdeen can withstand the downturn, that its standing as the Oil Capital of Europe will continue to attract big money investors who may see the current difficulty as a time to buy in the expectation that the cycle will once again turn in the city’s favour. Faisal Choudhry, of Savills, said the offer on the Lyall mansion showed “renewed confidence” in the city’s ability to weather the storm.

Those fearing an exodus of jobs and companies may beg to differ. Estimates of the number of posts likely to be lost run into the tens of thousands and the oil majors have confirmed that investment will be scaled back or postponed until the price rallies and makes exploration and production viable.

One immediate impact has been to reduce the rates of pay to contractors. This is considered no bad thing by some observers who believe pay has got ahead of itself and added to the industry’s cost burden at a time when it needs to be more cost-efficient.

Some of those firms, including those who will be needed for vital infrastructure work in other industries, are now finding workers more affordable, according to Scott Black of recruitment agency FWB Park Brown in Edinburgh.

He told Daily Business in a recent interview that many oil sector workers, including those in technical and health and safety work, will find jobs in infrastructure projects where spending is currently high.

“The oil industry has been soaking up a lot of the best people and many will just go back into the industries they came from.”

He also predicted a wave of mergers and acquisitions as bigger companies sell off assets and small firms see an opportunity to sell and realise value.

“Most of the private equity world will be interested in the opportunities created. They have a lot of cash.”

Guy Martin, of rival recruitment agency Eden Scott, said close to half the turnover of his business is in the oil and gas sector and agreed that the wider economy would benefit from the fall-out of jobs from the sector.

In the meantime, political pressure is focused on calls for a cut in the taxes paid by oil companies in order to underpin their activities and ensure investment continues to flow into the North Sea.

George Osborne , the Chancellor, who made a major mistake in hiking taxes in 2011, is certain to do something, though he seems to be resisting calls for immediate action, no doubt to make maximum impact in next month’s pre-Election Budget.

Whether his statement will go further and include an agreement to support the Oil Summit’s call for a City deal is less clear.

With the oil price showing some signs of bottoming out, Mr Osborne may be inclined to limit his support to the energy companies whose contribution to the Treasury plays a big part in his overall plans for the UK economy.

The fall in the oil price is not just a blow to the North Sea but to the UK government. The oil mogul Sir Ian Wood says a $50 barrel will punch a £200 billion hole in the economy’s bank balance.

Mr Osborne, as such, relies on black gold as much as the industry itself. His task therefore is finding a level of taxation that keeps Aberdeen and its oil hinterland in gainful employment while not undermining his own tax and spend requirements.

 

 

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