A year on from a £2bn raid on North Sea profits, industry operators, suppliers and advisers have expressed satisfaction with changes made in this week’s Budget to the taxing of those involved in UK oil and gas production.
That raid, used in part to finance a 1p a litre reduction in fuel duty, raised the marginal tax rate facing operators of fields to between 62 per cent and 81 per cent.
Crucially, it also capped and decoupled allowances that allowed North Sea oil companies to calculate how taxes paid on field development and production could be cumulatively set against the heavy burden of dismantling rigs and equipment once the oil and gas of fields run dry. The burden has been estimated at up to £30bn.
Pledges on Wednesday by chancellor George Osborne to now commit the government to more contractual certainty in dealing with these decommissioning costs of the UK’s ageing platform fleet have been welcomed.
Andrew Moorfield, managing director for oil and gas at Lloyds Bank, one of the biggest lenders to operators in the North Sea, says the tackling of uncertainty on decommissioning relief should be “positive” for the UK North Sea oil and gas industry.
While details are still to emerge, he says the measures should remove a “roadblock” that had severely restricted the sale of late-life fields from the majors to UK oil and gas minnows.
“These minnows, with their management focus and technical expertise to maximise recovery of late-life fields, have been a UK North Sea success story,” he says.
The industry may still be seeking more detail on how Mr Osborne’s decision to offer £3bn in field allowances to deeper and more extensive fields in the relatively unexploited waters west of Shetland will be implemented, but BP has already responded.
On Thursday, the Department of Energy and Climate Change announced that the company had won government approval to extend its exposure to the exploration zone through plans for a deep water North Uist well 125km northwest of the Shetland Islands. The oil major had last autumn committed itself to a £4.5bn oilfield development in the huge Clair field also in the zone.
While environmental campaigners highlight the potential risks of opening up the west of Shetland – particularly in the light of BP’s involvement in the deep water Macondo disaster in the Gulf of Mexico in 2010 – Total, the French oil group, is also active in exploring the waters.
It has previously argued the area is one of the last great undeveloped resources of the mature North Sea, which could contain up to 4bn barrels equivalent of oil and gas – representing up to 17 per cent of remaining UK reserves.
However, Marcus Richards, chief executive of North Sea focused Dana Petroleum, says while the area still has abundant reserves the “game is changing”.
“The future won’t be about the majors running large facilities producing hundreds of thousands of barrels each day.
“It’ll be about small and mid-sized companies exploiting smaller fields using innovative technology and sharing supply chains to create efficiency and reduce operating costs. The Gulf of Mexico is a great example of a mature basin where this is happening today.”
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