Chancellor urged to use budget to support ailing North Sea oil industry

Key oil industry figures have called on the chancellor to use next month’s budget to prop up the North Sea oil industry after a collapse in investment.

The trade body Oil & Gas UK called for permanent tax breaks, warning that low Brent crude prices were choking off the investment needed to extract the oil left under the North Sea.

It expects cash-strapped members to spend just £1bn on new projects this year, compared with an annual average of £8bn over the past five years.

It came as the International Energy Agency warned that investment cuts worldwide meant that when prices start to rise – as it expects in 2017 – they are likely to jump sharply.

Fatih Birol, executive director of the IEA, said: “It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not too distant future.”

The agency forecast that global oil supply would grow by 4.1m barrels a day between 2015 and 2021; in the previous six years it grew by 11m barrels a day.

Oil & Gas UK said the North Sea firms had tried ensure the industry stayed afloat by slashing costs. It said oil explorers on the UK continental shelf cut the cost of production by 40% from an average $29.30 a barrel in 2014 to $20.95 last year.

But the oil price has tumbled by about 70% – or more than $100 a barrel – since the summer of 2014, wiping out the effect of the cost-cutting drive.

Oil & Gas UK said that while firms could make further cuts, they would struggle to afford investment with oil hovering at about $30 a barrel. It called for urgent changes to the taxes paid by North Sea companies, warning of heightened fears over the long-term future of the industry.

Oil companies were handed tax relief last year when George Osborne reduced their rate to 50%, or up to 67.5% on some fields where petroleum revenue tax also applies. But Oil & Gas UK said the chancellor must go further or risk seeing the North Sea’s decline accelerate, adding to job losses in the industry. “A significant, permanent reduction in those rates is now urgently needed,” said Oil & Gas UK’s chief executive, Deirdre Michie.

The trade body pointed to the potential impact of a shrinking oil industry on the wider economy. It said total capital expenditure fell from £14.8bn to £11.6bn last year and predicted it would drop further, to £9bn this year.

A study by Rystad Energy found that the supply chain serving the North Sea shrank by about 25% last year and was expected to contract further this year.

The increasing difficulty of making money in the North Sea is also speeding up decommissioning, where companies shut down oilfields that are no longer economically viable.

This has seen reserves held by companies for future development fall from 10bn to 8.8bn barrels of oil, compared with Oil & Gas UK’s estimate of 20bn barrels remaining overall.

The trade body believes that decommissioning will cost up to £55bn by 2050, while Revenue & Customs estimates that the taxpayer will pick up £16bn of the bill through tax relief on decommissioning.

Oil & Gas UK warned that “the pace of decommissioning is accelerating”, indicating that the cost of dismantling old oil platforms and cleaning up after them could rise still further.

The accelerating decline of the North Sea is forecast to punch a hole in the UK’s tax take, even as Osborne battles to erase the deficit. The Office for Budget Responsibility predicts receipts of £130m from the North Sea in 2015-16, compared with £11bn four years previously.

“The basin has to compete fiercely in the global market to attract price-constrained capital to the UK,” said Michie. “Together we need to transform the basin into a highly competitive, low-tax, high-activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here.”

David Cameron announced a £20m package to support the oil industry last month, on top of £500m for the north-east of Scotland, which is particularly reliant on the sector.

But Scotland’s deputy first minister, John Swinney, has urged Osborne to cut industry taxes once again and provide extra assistance such as loan guarantees.

Iain Conn, chief executive of Centrica, owner of British Gas, has also called on Osborne to intervene, citing an estimated 65,000 job losses in oil and connected industries in 2015.

“The North Sea is really hurting,” he wrote in a letter to the chancellor. “The government needs to be agile here. It needs to encourage companies to keep their fields going and keep their people. The government has to be really thoughtful about taxation in the North Sea.

“They can always put it up again – indeed, they have quite a good record of doing that. But right now there is a case to be made that corporation tax in the North Sea should just be corporation tax and that petroleum revenue tax should probably disappear for a while.”

Powered by article was written by Rob Davies, for The Guardian on Tuesday 23rd February 2016 00.42 Europe/London © Guardian News and Media Limited 2010


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