As well as the obvious and adverse impact on oil and gas exploration companies, national governments need to adapt fiscal policies if they wish to maximise economic recovery from these assets.
Citing clear evidence from Norway, Edison Oil and Gas said governments which wish to maximise oil recovery need to focus on tax-incentives for exploration rather than ‘traditional’ tax-generation.
A spokesman explained; “The current depressed crude oil price is having a huge effect. Falling cash generation means oil companies are cutting capital expenditure to balance the books.
“Not even this is enough – many international oil companies are now paying dividends out of debt.
“In this environment, exploration has been hard hit and we have seen a huge fall off in exploration wells drilled in the last 18 months, while the Brent forward curve implies a muted recovery.
“While service costs continue to adjust, companies are unlikely to invest in exploration unless returns improve. Governments have a role to play in this. Just as they increased fiscal take in the upswing, they should be prepared to reduce the tax burden in the downswing.
“For example, we believe that Côte D’Ivoire is showing the way in this respect. The recent deal announced by African Petroleum in its farm-out with Ophir Energy includes a revision to the PSC in Côte D’Ivoire that reflects “the current commodity price environment and outlook for development of the deepwater prospects”.
“This fiscal flexibility in approach means that exploration is more likely to happen in Côte D’Ivoire than in other countries.
“This means that Côte D’Ivoire could see increased investment and better long-term prospects when/if oil prices recover – even if this process is many years, or decades away. Those countries that are not looking to incentivise exploration now will suffer in future.
Importantly, with the benefit of hindsight of the rise in oil prices from 2004-2008, it should be possible for countries to facilitate exploration in lower oil price environments while retaining the economic rent of higher prices.
“Effective incentivisation to explore by governments in exploration in the short term should pay long-term dividends.
“The effect of fiscal adjustment to boost exploration is very clear when looking at the tax rebate system introduced by Norway in 2005. The number of exploration wells increased materially, and production from the Norwegian North Sea has benefited as a result, as the chart shows”.
Meanwhile, Aberdeen Donside MSP Mark McDonald has reiterated the SNP’s call to the UK government to make 2016 a year of action in supporting exploration in the oil and gas sector, following a significant intervention by Sir Ian Wood.
The former Wood Group Chief Executive has urged common sense and government action as firms brave the pressures of low global oil prices.
Sir Ian has cautioned against negativity or panic in the industry, stating: “We can’t throw up our hands and say this is a disaster. We can’t do that. We’ve got to keep thinking and planning and finding the few things we can do. We have to keep thinking this will get better.”
McDonald said: “Sir Ian is one of the most respected figures in the oil and gas industry worldwide and I welcome his call for considered solutions to help the sector recover.
“The SNP can absolutely support his suggestion of new ‘sensible measures’ from the UK government – especially on incentivising exploration and development of new prospects to protect North Sea jobs and sustain a vital industry.
“Encouraging exploration and new drilling would enable support for the supply chain which is also being hit by the downturn – with fewer orders being made and services commissioned.”