In a seaport city renowned for its stout, grey granite buildings, the new headquarters of EnQuest PLC stand out like a great white whale. Eight storeys of gleaming stone and glass, it's a veritable skyscraper by local standards and dominates a rundown waterfront area once filled with fish processing plants.

But the building is already a victim of oil's plunge, which is clobbering the North Sea oil industry and shredding thousands of jobs. In an effort to preserve capital, EnQuest, the biggest independent producer in the North Sea's British side, is selling the building even before it's occupied.

"The North Sea was struggling even at $100 [U.S.] oil," EnQuest chief executive officer Amjad Bseisu says from his London office. "I think we're in a defining moment for the North Sea. We could either see precipitous decline or the industry will have to reinvent itself."

Story continues below advertisement

In Aberdeen, Neil McCulloch, 44, president of EnQuest's North Sea operations, says there is no way the new office, which will be leased back after it's sold and house 500 local EnQuest employees, would have passed budget muster with Brent crude oil at $60 a barrel. "We would not build our new building today," he says.

The building was approved in 2013, when the North Sea, in spite of its relentless production decline, was buzzing with hope and activity. Oil was over $100 and new players with fancy technology, such as horizontal drilling, were squeezing torrents of oil out of old fields abandoned by the big companies. Wealth was washing through Aberdeen, a one-industry wonder where drilling-industry helicopters fill the skies, new shopping malls are stuffed with Italian fashion shops and Mercedes taxis are ubiquitous.

But it was a mirage, because the North Sea is one of the global industry's most expensive production areas.

The plunge in oil prices since last summer – down about 50 per cent – is especially damaging to North Sea producers because costs had been allowed to climb to outrageous levels. Mr. McCulloch estimates that industry-wide operating and capital (or development) costs per barrel quadrupled over the past decade, but he has no easy explanation for the relentless rise.

Euan Mearns, the independent energy analyst and geologist in Aberdeen who writes the popular Energy Matters blog, thinks the recent North Sea boom was really a wages and employment boom disguised as an oil boom. "As the oil became more difficult to get at, it became more expensive," he says. "Costs soared and employment went up, partly because of aging infrastructure. More maintenance workers were required and there was a manpower shortage."

A report released Tuesday by Oil & Gas UK, the industry lobby group that has been pushing the Westminster government for a lighter tax and regulatory regime since the price collapse last fall, highlights the cost gusher. In 2014, North Sea operating costs rose 8 per cent to £9.6-billion ($18.5-billion), equivalent to record high of £18.50 a barrel.

The figure excludes capital costs, which could easily match or exceed the operating costs, depending on factors such as the geology of the field and its depth. As a rule of thumb, North Sea operators need oil of $60 (U.S.) or more to break even, meaning the British sector as a whole is struggling to stay out of the red at current prices, even if disciplined oil companies can make money on some of the prolific fields (as fields deplete, costs rise).

Story continues below advertisement

The oil drop inflicted a lot of damage last year even though prices did not start to decline until June and did not fall off a cliff until November, when Saudi Arabia-led Organization of Petroleum Exporting Countries refused to cut production to prop up prices. According to Oil & Gas UK, revenues in 2014 fell to £24-billion, their lowest level since 1999. Add rising costs into the mix and the "basin," as it's called, last year recorded negative cash flow of £5.3-billion, the worst since the 1970s. Barring a snap-back in prices – unlikely given the Saudis' resolve to nab market share by choking off expensive production – 2015 is bound to be even more painful.

"The industry recognizes that its cost base is unsustainable," says Malcolm Webb, CEO of Oil & Gas UK. "Cost and efficiency improvements of up to 40 per cent are required to give this basin a viable future. This adjustment is now under way, but cost alone is not the answer."

The North Sea is not the gift that keeps on giving. Production began in the mid-1970s and rose sharply over the next two decades, financing Margaret Thatcher's British economic overhaul as manufacturing and mining gave way to oil and gas and banking. By the mid-1980s, total British production, almost all from the North Sea, hit 2.7 million barrels a day.

It later dipped, as prices fell, then rose again, reaching almost three million barrels a day at its 1999 peak. Foreign companies joined the oil rush, including some of the biggest Canadian industry names – Nexen, Suncor, Talisman Energy and Canadian Natural Resources. Since then, production has been riding the down escalator, dipping to 1.4 million barrels last year, though the figure could rise slightly as projects that were committed before the price collapse reach completion.

The output plunge is only part of the story. Capital spending was climbing relentlessly as more effort was made to try to slow the North Sea's decline. Expenditures went from £5.2-billion in 2008 to £14.8-billion in 2014, a lot of it due to project cost overruns. Operating costs also rose to scary levels, from £4.5-billion in 2004 to £7.8-billion in 2012 and last year's £9.6-billion.

Rising oil prices can hide a lot of spending sins. But when prices go into reverse they are fully exposed. Returns are now getting obliterated; "margin compression," to use the analysts' argot, is now under way. As a result, North Sea oil companies are whacking down costs as fast as they can while they pray the Saudis lose their nerve and cut production.

Story continues below advertisement

Gordon Mutch, owner of a well-management business in Aberdeen called GDPM, says, "I don't know anyone looking to commit projects at these prices."

His friend Jo Mcgregor, director of McGregor Consultants, an agency that finds drilling and engineering professionals for oil projects worldwide, says Aberdeen has battled its way through several downturns, but that "this one feels different" because the price was rude enough to fall in the absence of a recession and OPEC, by not cutting output, is no longer following its once-predictable script. "People here are really scared," she says.

EnQuest, to take but one company, has cut its 2015 capital expenditures by 40 per cent, to about $600-million (U.S.) and has squeezed operating costs by 10 per cent, partly by insisting that its top 30 or so suppliers reduce their prices by 10 per cent to 15 per cent. Labour is next. The oil companies are pushing for a "3:3" contract, meaning the offshore drilling and production workers would work three weeks followed by three weeks off instead of the standard two weeks on, three weeks off, or 2:3. In effect, the new system would shave labour costs by 20 per cent.

Jake Molloy, regional organizer in Aberdeen for the National Union of Rail, Maritime and Transport Workers (RMT), says employment levels will plunge as projects are curtailed or cancelled and cost-cutting becomes the industry mantra. The cover of its February union bulletin features an the image of a man holding a bloody straight razor with the title "Death by 1000 cuts."

Of the 30,000 or so offshore workers in the British North Sea, he expects as many as 6,000 to disappear by the summer and fully third to be gone by the end of the year.

Mr. Molloy says a graphic image of the downturn can be found in Cromarty Firth, a natural harbour in the rugged Scottish coast about 200 kilometres northwest of Aberdeen. The firth is where idle mobile drilling rigs are taken. Some are "warm stacked," meaning their crews are kept on board in anticipation of a quick return to work. Others are "cold stacked," meaning they are shut down before being sent to the great scrapheap in the sky.

Story continues below advertisement

Cromartry Firth is filling up with parked rigs and Mr. Molloy thinks half of the 38 North Sea rigs will eventually find their way there, never to emerge again. "This industry is going to shrink," he says. "The speed is incredible and if we get down to $30 oil, it could be terminal."