LONDON (Dow Jones), Feb. 12, 2010
Total SA said Friday it will go ahead with the development of two gas fields in a remote area of the U.K. North Sea that is the country's last big untapped hydrocarbon basin.
The French company's decision is a major boost for the flagging U.K. oil industry and a notable success for recent changes to the North Sea tax regime.
The development of Total's Laggan and Tormore gas fields will be a vital first step in unlocking undeveloped resources in the remote West of Shetland area, said Patrice de Vivies, head of Total's European upstream operations. The British government estimates West of Shetland could contain 4 billion barrels equivalent of oil and gas -- 17% of remaining U.K. reserves.
Final sanction will be given to the fields in March, and they should come on stream by 2014, said de Vivies. Total will build extra capacity into the 150-kilometer subsea pipeline that will connect the fields to a gas-processing plant at Sullow Voe on the Shetland Islands and then transport it to the Scottish mainland so that other discoveries in the area can use it when they are developed, he said.
Total has offered the operators of those discoveries a direct equity stake in the pipeline, or the option to pay a tariff for its use at a later date, de Vivies said. So far, only Total and its partners in Laggan and Tormore, Chevron Corp (CVX), Eni SpA (E) and DONG Energy, have committed to funding the pipeline, he said.
Other companies that have discovered oil and gas fields in the West of Shetland area include Faroe Petroleum PLC (FPM.LN), Dana Petroleum PLC (DNX.LN), Exxon Mobil Corp. (XOM) and BP PLC (BP).
Recent changes to the North Sea fiscal regime that gave West of Shetland field developers new tax breaks were an important part of the decision to proceed with the development, de Vivies said.
"Without the taxes I am not sure we would have been able to make the decision so quickly," he said. "Now we have the positive decision from the government, we will go ahead as soon as possible."
The government last month extended to West of Shetland a tax break to encourage the development of technically challenging fields in the North Sea -- those with heavy oil or at very high pressures and temperatures. The measure could provide up to GBP160 million worth of tax relief for each gas field in the West of Shetland region, the Department for Business, Innovation and Skills said in a statement. The changes to the tax incentives are subject to approval by a vote in Parliament before March.
"The British government has shown a lot of pragmatism in its decision on tax," de Vivies said. "2009 was a very bad year for investment in exploration and production in the U.K., and the tax system has a large impact on activity. The government will need to give case-by-case incentives if it wants to see marginal fields developed."
Last year was the worst year in the history of the U.K. oil and gas industry for bringing new reserves into production because of the oil price slump and difficulties many smaller companies had funding drilling, said a report from consultancy Wood Mackenzie last month.
The U.K. North Sea is dominated by mature fields whose production is declining and which are nearing the end of their lives. It is particularly important for new resources to be developed to offset the natural decline in production.
According to statistics from the U.K. Department of Energy and Climate Change, U.K. oil production was down 10% on the year in the third quarter of 2009 and gas output was down 18.5%.
Copyright (c) 2010 Dow Jones & Company, Inc.
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