Fiscal Regime Threatens UK Offshore Oil & Gas Investment

A small number of large projects are driving UK offshore oil and gas investment in the short term but evidence is building that the medium to long term prospects of this mature province are being frustrated by the structure and instability of the current fiscal regime, according to Oil & Gas UK which on Monday published its 2012 Activity Survey.

Oil & Gas UK Chief Executive Malcolm Webb: "It would be a mistake to take the current major project activity as a sign of long-term confidence across the industry. This year and next will see high investment on a few large projects which were commercially committed before last year’s [UK government] Budget. However, 2011 production saw a record drop, exploration halved and business confidence remained sluggish, despite an average oil price of $111 per barrel."
"By taking the right steps in the 2012 Budget, at no additional cost to the Exchequer, the Chancellor could boost UK production with benefits for UK investment, jobs, the balance of trade and energy security. Implementing the proposals developed out of joint work between the UK Treasury, Department of Energy and Climate Change (DECC) and industry over the past year would send a powerful signal and unlock an extra three billion barrels of oil and gas to the great benefit of the economy and the Exchequer."
UK oil and gas production fell by 18 per cent to 1.8 million barrels of oil and gas equivalent per day (boepd) due to a large number of unplanned stoppages combined with the lowest ever volumes of new production coming onstream. Oil & Gas UK estimates that had production stayed on track, UK GDP would have been 0.2 per cent higher.  Although production in 2012 is forecast to rise modestly to 1.85 million boepd, the overall profile for the next five years remains depressed. 
Webb continued: "The drop in 2011 production illustrates some of the economic challenges we face in this mature oil and gas province – rising costs and the need to inject more capital to sustain the existing production base. Although headline investment has tripled over the last decade, the amount of oil and gas recovered per pound invested has fallen by two thirds over the same period. This effectively leaves us fighting hard to stand still. Current and planned UK investment must be seen in light of this acute decline in capital efficiency and viewed in a global context – the UK attracts less than four per cent of global oil investment."
2011 investment of $13.5 billion (GBP 8.5 billion) to bring new reserves into production was at the top end of our expectations formed after Budget 2011. As we predicted at that time, the expenditure was dominated by the development costs of a small number of large projects which were commercially committed before the tax changes. Investment was also driven by substantial capital spend on maintenance to prolong the life of ageing assets. These factors will continue to drive capital spending in 2012, which is expected to reach $18.3 billion (GBP 11.5 billion).
The survey shows that while up to 24 billion boe could still be extracted from the UK continental shelf, current plans will likely only develop around 10 billion boe. Worryingly, only 15 exploration wells, half the 2010 number, were drilled, making it the lowest year for exploration since the beginnings of the industry in the UK.
To increase critical exploration activity and produce closer to 24 billion boe, the fiscal regime must be stable. Certainty on the availability of tax relief on decommissioning costs and extension of the field allowance structure to promote fiscally stranded investment will yield three billion boe of additional reserves, at no net cost to the Exchequer. These measures will increase production and delay decommissioning – creating tens of billions of pounds of additional tax revenue for the Exchequer.
Webb concluded: "The industry is a major contributor to the UK economy. In addition to the billions paid in taxes, 60 percent of all our energy supply comes from oil and gas produced in the UK. The sector, which is the largest industrial investor in the economy, supports 440,000 jobs spread across the country. Continuing fiscal instability will accelerate decline. By providing a correct, certain and predictable fiscal environment, the Government can help ensure, at no net cost to the Exchequer, that this industry fully contributes to the growth agenda through increased investment, the creation of more good jobs and technology driven development."


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