Tax Breaks Spur Record UK Offshore Oil & Gas Spend

LONDON - Tax incentives have helped spur record levels of investment in the U.K.'s offshore oil and gas sector that will reverse over a decade of output decline from 2014 and boost flagging government coffers, giving some cheer to the government, which is teetering on the brink of its third recession in five years.

Investment in offshore oil and gas projects is forecast to rise to a record level of at least GBP13 billion this year, up from GBP11.4 billion last year – the highest in more than 30 years, according to an annual report, published Monday, on activity in the sector from industry body Oil & Gas U.K.

"This year and next we expect record levels of investment and that's a relief when you look at how much production has fallen. It will be a catchup from a long period of under-investment," said Mike Tholen, Oil & Gas UK economics and commercial director and one of the authors of the report.

North Sea oil and gas production is vital for the U.K. economy.

Last year's shutdowns at several key fields was a major reason for the 0.3% contraction of economic output in the last quarter of the year, according to the Office for National Statistics. Extractive industries, the bulk of which is oil and gas, contribute 2.4% of total U.K. gross domestic product, the ONS said.

Increasing output will also be significant for tax receipts and jobs in a sector that last year employed 440,000 people.

The 45 projects that were approved in 2011 and 2012 alone will over time produce more than 2 billion barrels of oil and gas and generate GBP100 billion value for the economy and an additional GBP25 billion in production taxes, the report said.

It will also help aid U.K. energy security by reducing hydrocarbon imports at a time of higher international oil and gas prices.

"Too often we've been seen as part of the problem, rather than part of the solution because production output had fallen. But we're stopping the decline and increasing output and that will have a more positive impact on the U.K. economy," Mr. Tholen told Dow Jones Newswires in an interview.

The higher investment in new projects, both small and large, as well as redevelopment of older fields, will help bring another 500,000 barrels of oil equivalent a day onstream by 2017, taking output up to around 2 million barrels of oil and gas a day by 2017 or possibly even earlier.

This compares to 1.55 million boe/day in 2012 and 1.45-1.5 million boe/day expected for this year, Mr. Tholen said.

The upturn expected in 2014 is significant, as oil and gas production from the U.K. continental shelf has been declining since a peak of 4 million boe/day in 1999 to 2000 due to natural decline rates at mature fields, high development costs and a wave of punitive taxes over the past decade, most notably a surprise tax increase in 2011.

BP PLC's April 2010 Deepwater Horizon disaster in the Gulf of Mexico also prompted a wave of shutdowns as companies re-assessed safety procedures.

However, over the past year, the U.K. government has introduced a raft of new tax breaks in an attempt to mend bridges with the oil and gas industry after the 2011 surprise tax increase curtailed investment and raised concerns about the future of the sector.

In total, companies are planning capital investments of almost GBP100 billion in new projects and redevelopment of old fields. Of this, GBP44 billion are already approved and under development and another GBP30 billion have a better than 50% chance of approval over the next few years, the report said.

These investments include Statoil ASA's GBP4.3 billion heavy oil field Mariner, Talisman's GBP1.6 billion plans to boost production at Montrose/Arbroath, GDF Suez's GBP1.4 billion for gas development at Cygnus gas and Dana Petroleum's GBP1 billion to develop its Harris/Barra fields.

Exploration for new oil and gas reserves is also expected to reverse a trend of decline with more than 130 wells forecast to be drilled over the next three years. This compares to around 21 wells a year from 2009-2012.

Easier access to finance and pressure to meet commitment dates set in licenses is helping to drive the higher exploration rates, Mr. Tholen said.


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