UK Offshore Operators: Treasury Turns 'Blind Eye' to Industry

Responding to Wednesday's Budget statement by UK Chancellor of the Exchequer Gordon Brown, the UK Offshore Operators Association (UKOOA), the representative body for North Sea production companies, accused the Treasury of turning a blind eye to the urgent needs of the UK's offshore oil and gas industry where production is being undermined by high costs and punitive tax.

Malcolm Webb, UKOOA's chief executive, said: "The Treasury clearly recognizes that lower taxes are good for business, but unfortunately fails to apply that principle to our industry.

"UK offshore oil and gas producers have not been given any reduction in corporation tax and still continue to suffer under a punitive 50% rate for corporation tax and a total tax rate of 75% on the production from its older assets. The Chancellor was quick to raise the tax take from this industry when he saw oil and gas prices rising towards $60 dollars a barrel. But now that the price of gas (which makes up almost half of total UK production) has fallen to the equivalent of $20 per barrel, he sits on his hands.

"With cash flows from UK gas fields now under severe pressure and the average cost of new developments running at $25 per barrel, doing nothing is simply not good enough. The Treasury needs to wake up to current realities."

UKOOA's latest member investment and activity survey, published last month, shows a drop in the forecast capital investment for 2007 of £1-£1.5 billion, to around £4-4.5 billion, after three years of growth.

Mike Tholen, UKOOA's economics and commercial director, said: "Sharply rising industry costs are a global phenomenon but they leave the mature UK sector increasingly exposed to lower oil and gas prices. The situation regarding gas is particularly acute."

It is estimated that the UK still has reserves of up to 25 billion barrels of oil and gas to recover but as a mature basin, faces increasing economic and technological challenges. Sustained investment will be essential to maintain the pace in exploration for new oil and gas discoveries, to bring on new developments and maximize the recovery of the UK's reserves. With the right business climate, including an appropriate tax regime, the UK industry could still be producing 40% of the country's primary energy needs in 2020 and significant volumes for decades to come.

The UK Offshore Operators Association (UKOOA) is the representative organization for oil and gas companies licensed by the UK government to explore for and produce hydrocarbons offshore around the British Isles. It has 41 members.

UK Oil and Gas Industry Key Facts:

  • Oil and gas currently supplies 75% of UK primary energy demand
  • Total recovery of indigenous oil and gas to date exceeds 37 billion barrels
  • Estimated remaining reserves are up to 25 billion barrels
  • Production in 2006 was 2.9 million barrels
  • The UK is the worlds 12th largest overall producer of oil and gas
  • The UK is a larger oil and gas producer than Nigeria, Kuwait or Indonesia
  • Production in 2007 is expected to rise to 3-3.1 million barrels
  • The UK will be self-sufficient in oil in 2007/8
  • Indigenous supply could still meet more than 60% of UK gas demand (and more than 90% of UK oil demand) in 2010
  • Capital investment in 2006 was £5.6 billion, the highest since 1998

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