UK industry chief calls for ‘urgent’ tax cuts as North Sea oil and gas industry teeters on edge of collapse with nearly half of all oilfields operating at a loss at $30-barrel

Jurassic-rig2The North Sea oil and gas trade body has today called on the UK government to bring in ‘urgent’ tax reforms and incentives to stop the industry from ‘tipping over the edge of the chasm’ as crude oil prices wallow in a geo-political ‘no man’s land’ in the economic cold war between US shale oil producers and Arab-led OPEC oil producers.

In its latest 2016 annual Activity Survey of members, Oil and Gas UK warns that the industry is on the  tipping point of a financial disaster.

Pulling no punches, it said: “Most concerning is the collapse of investment in new projects. This year the upstream industry is expected to approve less than £1 billion to spend on new projects, compared to a typical £8 billion per year in the last five years – sparking fears for the long term future of the industry.

The report also issued the following three dire warnings; –

  1. If the oil price remains at c$30-barrel for the rest of 2016, nearly half – 43% – of all North Sea oil fields are likely to be operating at a loss, deterring further exploration and capital investment, and making additional cost improvement imperative.
  2. Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further this year to around £9 billion.
  3. The pace of decommissioning is accelerating. Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100.  Reserves reported by companies for potential future development have fallen from 10 to 8.8 billion boe, as projects are deemed uncommercial in the current environment.

And OGUK Chief Executive Deirdre Michie bluntly warned UK finance minister George Osborne; “We need more tax cuts to encourage investment and exploration”.

Sector-wide action has pushed unit operating costs down by a third from an average of $29.30-barrel of oil equivalent (boe) in 2014 to $20.95-barrel in 2015, aided by a 10% rise in oil and gas production – the first in 15 years.

Costs are expected to fall by a further 20% this year to around $17-barrel, representing a 42% improvement in just two years.

However, pressures on the sector have grown as prices have continued to fall.

The oil price has fallen by 70% since summer 2014 and the average daily gas price by 20% last year.  Despite the rise in production to an average of 1.64 million barrels-day in 2015, revenues fell by 30% to £18.1 billion.

Michie said: “The North Sea is entering a phase of ‘super maturity’.  While the industry’s decades of experience provide great depths of knowledge and expertise which can be applied to recover the still significant remaining resource, our report highlights the challenges that the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas.”

“Whilst success per exploration well drilled in 2015 was the highest for 10 years, the rate of exploration for new oil and gas reserves remains at an all-time low. Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, as few as seven to 10 exploration wells and six to nine appraisal wells are forecast to be drilled this year – leading to a further downturn in activity.”

Previously sanctioned capital investment that was being spent over a period of several years is tailing off.

The whole of UK’s oil and gas industry is under intense pressure in the current business environment of sustained low oil prices. The industry is working closely with both the Scottish and UK Governments and its regulator, the Oil & Gas Authority, to adapt.
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Looking ahead, with depressed production revenues leaving very little to re-invest, less than £1 billion of fresh capital in new projects is expected to be sanctioned this year, compared with an average of £8 billion per year over the last five years.

Deirdre Michie,
Deirdre Michie

She added: “The North Sea has to compete fiercely in the global market to attract price-constrained capital to the UK.  A coherent approach by the industry, regulator and Government will be critical to boost the industry’s competitiveness and its investors’ confidence.

“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.

“It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.

“The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying PRT).  A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years. Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”

 “We have a huge task ahead but the prize is worth fighting for. The North Sea still holds up to 20 billion barrels oil/ equivalent, which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”

Meanwhile, crude oil prices fell 4% last night after Saudi Oil Minister Ali Al-Naimi ruled out any production cuts, restating the kingdom’s rationale for maintaining output is  that ‘demand would absorb excess crude <supply>’ that has crushed prices over the past 20 months.

Benchmark Brent crude futures settled down $1.42, or 4%, at $33.27-barrel, while US crude futures CLc1 fell $1.52, or 4.6%, to $31.87-barrel.

22 Feb 2016 Scottish Energy News – http://goo.gl/HggCK2

OPEC only expected crude oil price to fall to $70 barrel (not $30-barrel) in its fight to choke off US shale

Lewis Macdonald, MSP, Labour’s Scottish energy spokesman, said: “It’s unlikely that the North Sea will ever produce the billions in tax revenues it did at its peak, and government has to recognise its importance to jobs and the economy is much greater than its future role as a source of government tax revenues.”

Tommy Campbell from the Unite union, said “the worst may still be yet to come”. He said: “It’s too late for tens of thousands of workers across the oil and gas sector who have already lost their livelihoods but tens of thousands more are reliant on the next steps of our political leaders and they are desperately looking for commitments and common purpose.”

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