LONDON Jun 12, 2007 (Dow Jones Newswires)
The U.K. government should slash tax on new North Sea gas fields by 20 percent or see much of the country’s remaining reserves remain untapped due to high costs, a senior executive at major U.K. gas producer BG Group PLC (BRG) said Tuesday.
Chris Cox, Vice President of U.K. Upstream for BG Group said the 20 percent supplementary charge the government imposed on all U.K. oil and gas producers in the wake of rising oil prices is stifling new gas development because gas prices are so much lower than oil.
“There is an immediate need for tax change, particularly on gas developments,” Cox said, speaking at a meeting of industry group Oil and Gas U.K. in London.
The price for U.K. gas for July delivery is around $22 a barrel of oil equivalent, compared to around $69 a barrel of Brent crude in the same month.
“Costs for gas developments have also been affected by oil prices,” Cox said, “tax doesn’t take account of this rising cost base.”
Malcolm Webb, Chief Executive of Oil and Gas U.K. said the average cost of a mobile drilling rig for exploration has risen to $500,000 a day, compared to around $50,000 a day in 2004. Other equipment and labor costs in the industry have also risen sharply. Strong demand for rigs due to a global boom in oil exploration has been the main driver of costs.
Cox said the decline in gas and oil production from the North Sea is faster than anyone was expecting because of high costs and taxes. “We’re spending more than we thought we were, and producing less than we thought we would,” he said.
Companies aren’t sanctioning new gas developments and some are canceling existing plans, he said.
Cox said he would like the government to exempt a portion of production from new fields from the 20 percent supplementary tax - either a set volume of gas, or anything produced over a set timeframe.
Willy Rickett, Director General of Energy at the U.K. Department of Trade and Industry said: “The interests of the U.K. economy and U.K. consumers are in securing gas as cheaply as we can from the most cost effective sources.”
Rickett said the DTI wants to maximize oil and gas recovery from the U.K. continental shelf and will continue a dialogue with the industry on how best to do this, but he doesn’t see any single easy solution.
“Our calculations show that even if you remove the (supplementary tax) entirely it would have no impact on gas development,” he said.
Government forecasts show U.K. gas supplies tightening again by 2013-2014, which may increase prices and offer a greater incentive to bringing new fields into production, Rickett added.
Cox said BG Group is having productive discussions with the government on this issue, but it is important to act fast.
“If there really are 25 billion barrels (of oil and gas) out there to be produced, we need to do that while the infrastructure is still out there,” he said.
Existing offshore infrastructure such as production platforms and pipelines are reaching the end of their life and some are already being decommissioned, he said. Without existing infrastructure to tie into, many of the remaining small pockets of oil and gas left in the North Sea may not be economic to produce, he said.
“Now is the time to act before the infrastructure disappears and the gas remains in the ground,” he said.
Copyright (c) 2007 Dow Jones & Company, Inc.
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