Oil & Gas UK: Changes Needed to Support UK's O&G Sector

LONDON (Dow Jones Newswires), Oct. 11, 2011

The oil and gas field allowance structure needs to be changed if the U.K.'s offshore oil and gas sector is to attract the investment necessary to exploit the potential 24 billion barrels of oil equivalent estimated to still lie beneath the North Sea, a U.K. industry body said Tuesday.

The government's March 2011 decision to increase the top rate of tax on profits from offshore production to 81%, while capping access to tax relief on decommissioning costs at old tax rates reduced the value of projects by almost a quarter overnight, Oil & Gas UK said in its 2011 Economic Report.

"A heavy tax rate, especially for projects involving additional investment in mature fields, and greater uncertainty over future tax treatment, has not helped the industry's case in proving attractive to international investors," Malcolm Webb, Oil & Gas UK's chief executive, said in a statement.

During 2010, GBP14 billion was spent on exploration, development and operations, including GBP6 billion invested in new projects, a 20% increase on 2009, the industry body said.

Investment volumes for 2011 are still expected to rise to GBP8 billion despite the tax changes, but they could decline going forward if the system isn't changed, Webb told Dow Jones Newswires.

Of the potential 24 billion barrels of oil equivalent estimated to still lie beneath the North Sea, only 10 billion barrels could be extracted with the current investment levels, and more investment will be needed to extract the remaining 14 billion barrels, he said.

Most recent data from the Department of Energy and Climate Change showed total indigenous U.K. oil production fell 15.9% in the second quarter from the same period in 2010.

North Sea oil and gas companies have been vocal in their criticism of Chancellor of the Exchequer George Osborne's March tax decision. And although the government and the industry have since set up a joint forum to discuss issues around the fiscal regime, resolution on possible tax relief for the decommissioning of old fields and installations will likely take some time, lawmakers have said.

The U.K. produced on average 2.2 million barrels of oil and gas equivalent a day in 2010, satisfying around 90% of the country's oil demand and 60% of its gas demand and reducing the U.K.'s requirement for imported oil and gas to the extent that the country's trade deficit was almost halved, Oil & Gas UK said.

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