N. Sea tax breaks are not enough and UK needs new incentives focused on exploration and development to encourage Norway-style re-investment

By ELAINE REYNOLDS

Marathon Oil Brae Alpha rigIn another time and place in a galaxy far, far away,  the North Sea oil and gas performance over the last year would be a cause for celebration with production from increased by 9.7% in 2015 from 2014 levels, representing the first production increase seen since the turn of the century.

N Sea oil and gas production
N Sea oil and gas production 2000- 2015: Source OGA

This has been achieved on the back of investing £100 billion (£60 billion in capex and £40bn in opex) in the basin over the last five years, which has also delivered an increase in production efficiency (annual production/production potential) from 60% in 2012 to over 70% in 2015 and seen operating costs reduced from $29.30-barrel in 2014 to an estimated $17p-barrel in 2016.

All this has been impressive but in the current $30-barrel oil price environment, over 40% of existing UKCS fields are operating at a loss.

If these fields were to be shut down, they would not only represent a loss of production for the basin, but also a significant reduction in the availability of the export infrastructure relied upon by many more fields.

With the loss making fields likely to be older, fixed structures, we expect that their closure would result in the removal of a disproportionately large part of existing infrastructure.

 

N Sea oil fields operating at a loss 43%
Percentage of N Sea oil fields operating at a loss (43%) – source Oil and Gas UK

With expenditure peaking at £14.8 billion in 2014, it is unlikely that the hard won improvements over the last few years can be sustained. Less than £10 billion is expected to be invested in 2016, with the majority of this going to existing sanctioned developments and less than £1 billion expected to be directed to new development.

Meanwhile, exploration activity has been dropping in the basin since before the oil price began declining and points to a future lack of projects to fill the pipeline.  

 

 

N. Sea oil exploration wells
N. Sea oil exploration wells; Source – OGA 

Number of exploration wells per year        Source: Oil & Gas UK, OGA

 

The industry has made substantial progress in reducing costs and improving efficiency and will need to work collaboratively to continue to do so.

The report believes this will not be sufficient to secure the future of the basin however and has called on the government to provide a lifeline through permanent lower tax rates combined with improvements in the Investment Allowance.

We question if these measures will be sufficient to stimulate investment and would look for wider commercial and fiscal incentives focused on exploration/ development such as has been successful in Norway to help boost activity.

Elaine Reynolds is a member of the Edison Oil and Gas investment research team

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