February 24, 2013 11:21 pm

UK to benefit from North Sea investment

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Britain is set to benefit from a surge of investment of up to £100bn in the development of North Sea oil and gas assets, a trend that is set to reverse a sharp decline in output.

In its annual snapshot of the sector, industry group Oil & Gas UK argued that the damage to investment caused by the chancellor’s £2bn tax raid in 2011 – when top marginal tax rates were raised to 81 per cent – had largely been overcome.

The trade group said overall spending is expected to increase from £11.4bn in 2012 to £13bn this year.

Malcolm Webb, Oil & Gas UK chief executive, said: “After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf is now benefiting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades.”

He argued that, in spite of the increases in top rate tax on output, moves by the government to extend targeted tax allowances to promote the development of difficult projects had aided investment.

The government’s commitment to remove uncertainty over the tax allowances available for the eventual scrapping of platforms and subsea infrastructure had also encouraged dealmaking by operators keen to take on and extend the life of older assets.

Britain could expect to suffer another decline in output this year, though the upswing in spending will eventually feed through to a recovery in production, said Mr Webb.

Production fell to 1.55m barrels of oil equivalent per day in 2012, down 14 per cent from 2011 and 30 per cent from 2010. This was in part due to a slump in investment between 2002 and 2008 linked to adverse tax decisions by the previous government, argues the report.

Production may fall again slightly this year to 1.45m –1.5m boe/d.

Oil & Gas UK says that the recent investment should help achieve a significant upturn over the next three to four years that should help output rise back to 2m boe/d by 2017.

This month Statoil, of Norway, won formal approval from the Department of Energy and Climate Change to lead a $7bn investment to develop the largest new offshore development in Britain’s sector of the North Sea in more than a decade.

GDF Suez, Dana Petroleum and Talisman have also secured the formal go-ahead from DECC for projects valued at £1bn or more.

A total of £44m of projects are now formally sanctioned by DECC, with a further £30bn of developments estimated by the trade body to have more than a 50 per cent chance of proceeding.

While UK oil and gas output appears set for a welcome recovery, investment returns are being hit by higher costs.

Inflation in wages and other operating costs is running at 8-10 per cent according to the body’s head economist Mike Tholen.

“Typically, the buying power of a pounds compared with 10 years ago has been reduced to a fifth,” he said.

The total cost of operating on the UK continental shelf is predicted to rise to £8.3bn this year.

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