UK vulnerable as oil and gas output drops

Britain’s vulnerability to the vagaries of North Sea oil and gas output has been highlighted by the sharp fall of receipts from a sector that normally contributes around a quarter of UK corporation tax.

The Office for Budget Responsibility signalled last month the danger of declining oil and gas revenues depressing tax receipts in July – usually the second-highest month for receipts and also when oil and gas companies pay the first of three instalments on yearly profits.

The OBR said on Tuesday that the 0.8 per cent drop in receipts was primarily due to a sharp fall in corporation tax “in particular from the oil and gas sector”.

North Sea output was “weaker than expected” in the first half of the year after the emergency evacuation and shutdown in March of the Elgin gas platform, operated by Total, of France.

The blow-out, along with other maintenance shutdowns across the UK’s depleting fields, contributed to a 15 per cent fall year on year in combined gas and oil production in the first half of the year.

The Department of Energy and Climate Change had previously anticipated flat gas production and a 7 per cent decline year on year in oil.

Elgin has yet to restart while the OBR said production in the second half of 2012 would also be reduced by “unusually high levels of maintenance in the North Sea”.

The Bank of England’s August inflation report cited the Elgin failure as a contributing factor in limiting second quarter growth in gross domestic product.

North Sea oil producers continued to benefit from prices that averaged $114 a barrel in the first half of 2012, only a little below the $118 a barrel assumed for 2012 as a whole.

But a £2bn tax raid by George Osborne in his March Budget last year raised the total tax raised from North Sea oil and gas operators from £9bn to £11.2bn in 2011-12.

That raid, used in part to finance a reduction of 1p a litre in fuel duty, raised the marginal tax rate facing operators to between 62 per cent and 81 per cent.

The sector’s trade body suggested on Tuesday that the UK’s unpredictable and high-taxation approach over several years had compromised attempts to slow the decline in North Sea output.

Malcolm Webb, Oil & Gas UK’s chief executive, said: “The dramatic fall in oil and gas production last year and consequent lower than anticipated tax revenue is very concerning. It can be attributed in no small part to the history of instability in UK oil and gas taxation resulting in lower investment in earlier years, meaning very few new fields started producing last year.

“In addition to this, several unexpected stoppages were required to maintain the integrity of the existing fields.”