N. Sea oil production rises and costs go down – but industry chiefs call again for more tax-breaks

oil-workers-cormorant-north-and-tern-platforms-scotentAnnual North Sea oil production has risen for the first time in 15 years, according to a new report by the Oil and Gas UK industry body.

Production rose by 10.4% in 2015, compared to the previous year, while the industry also reported a 45% drop in the cost of producing a barrel of oil / gas from the basin.

However, despite the positive news in Oil & Gas UK’s Economic Report 2016, major challenges remain. The supply chain has seen an average fall of 30% in revenues since 2014 and ongoing job losses – some 120,000 are expected to have been lost across the UK by the end of 2016.

Exploration for new reserves has fallen to its lowest level since the 1970s and, with so few new projects gaining approval, capital investment is expected to drop from £14.8 billion (2014) by £2-4 billion in each of the next three years

The investment outlook over the next three years is dominated by a small number of large developments that received final investment decision before the oil price began to fall in June 2014 and which are still progressing to completion.

Investment in just four of those projects – Clair Ridge, Schiehallion, Mariner and Kraken – is expected to account for around one third of total investment this year. Much of the remaining investment comes from a multiplicity of smaller projects that were sanctioned between 2011 and 2013, and are now approaching completion.

Given the size of these developments, capital investment is unlikely to fall below £10 billion this year, despite the challenging economic climate. Most of these projects will come on-stream over the next three years and will, in turn, support a gradual improvement in the production outlook.

Nearly three years ago (Dec 2013) Oil and Gas UK forecast that 35,000 oil industry jobs would be lost in the UK with most of them (23,000) in Aberdeen and Grampian.

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As a result, the industry has today called for new government support to attract fresh investment into what the UK regulator calls ‘a mature basin – but with frontier oil potential.’

Launching the new report, Deirdre Michie, Oil & Gas UK chief executive, said: “The UKCS is in urgent need of fresh investment to boost exploration and drive activity, particularly for the supply chain.

“Exploration has fallen to record lows and little new investment has been approved in 2016 – and 2017 looks no better.  Increased asset trading is one area that could free up new investment by facilitating the trading of late-life assets.  

“In light of this I am calling on governments today to vigorously champion the UK’s oil and gas industry, by providing certainty in our fiscal regime, encouraging new entrants to the market and recognising our supply chain as vitally important to the economy.

“The evidence in the report demonstrates what our industry can achieve when the basin’s competitiveness is addressed and the tax regime reformed.

“Now it is time for the UK and Scottish Governments to reinforce their efforts to promote the UKCS, nationally and internationally, as an attractive investment with world leading capability from front end exploration to late life operations. So today, Oil & Gas UK is making three asks:

  • “For the UK Government to re-affirm its continued commitment to the Driving Investment fiscal strategy which recognises the need for a more competitive, simple and predictable fiscal regime as the basin continues to mature;
  • “For the UK Treasury to complete the constructive work on decommissioning tax relief over recent budgets by introducing measures to enable tax relief to be transferred upon an asset sale to facilitate the trading of assets, encouraging new entrants to the market and liberating new investment for buyers and sellers alike, and for:
  • “The Scottish and UK Governments to promote the increasing competitiveness of the basin as well as the capability of the UK’s oil and gas supply chain, both nationally and internationally, as part of the UK’s new industrial strategy, recognising our sector as a key element of the economy.”

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