Tax cut required ‘for future of oil and gas’

Oil & Gas UK chief executive Deirdre Michie

Oil & Gas UK’s 2016 activity survey published on Tuesday said exploration remains at an all-time low “with no sign of improving” and that a collapse of investment in new projects has increased fears “for the long term future of the industry.”

The trade body said the upstream industry is expected to approve less than £1 billion to spend on new projects this year, compared to a typical £8 billion a year over the last five years.

Oil & Gas UK called on the UK Government for urgent reforms of the special taxes paid by the industry.

Such tax cuts could help attract investment back into the UK Continental Shelf (UKCS) and minimise loss of capacity during the downturn, the trade body said.

“The industry currently pays special taxes at a headline rate of 50% — 67.5% for fields paying PRT,” said Oil & Gas UK chief executive Deirdre Michie.

“A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years.”

The activity survey showed the oil and gas industry had improved efficiency, reduced operating costs and increased production.

But if the oil price remains at around $30 for the rest of 2016, nearly half (43 per cent) of all UKCS oil fields are likely to be operating at a loss, deterring further exploration and capital investment, the trade body said.

Unit operating costs have been pushed down by a third from an average of $29.30/barrel of oil equivalent (boe) in 2014 to $20.95/boe in 2015, helped by a 10% rise in oil and gas production — the first in 15 years.

Costs are expected to fall another 20% this year to around $17/boe, representing a 42% improvement in just two years.

However, the trade group said “pressures on the sector have grown as prices have continued to fall” — the oil price has fallen by 70% since the summer of 2014 and the average daily gas price fell 20% last year.

Despite a rise in production to an average of 1.64 million boe per day in 2015, revenues fell by 30% to £18.1 billion.

“The UKCS is entering a phase of super maturity,” said Michie.

“While the industry’s decades of experience provide great depths of knowledge and expertise which can be applied to recover the still significant remaining resource, the report highlights the challenges that the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas.”

While “success per exploration well drilled” in 2015 was the highest for ten years, the rate of exploration for new oil and gas reserves remained at an all-time low.

“Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, as few as seven to 10 exploration wells and six to nine appraisal wells are forecast to be drilled this year – leading to a further downturn in activity,” said Oil & Gas UK.

Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall this year to £9 billion.

Further, the pace of decommissioning is accelerating.

“Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by a fifth to over 100,” said Oil & Gas UK.

Reserves reported by companies for potential future development have fallen from 10 billion boe to 8.8 billion boe, as projects are deemed uncommercial in the current environment.

“A coherent approach by the industry, regulator and government will be critical to boost the industry’s competitiveness and its investors’ confidence,” added Michie.

“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here.

“It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime …

“We have a huge task ahead but the prize is worth fighting for.

“The UKCS still holds up to 20 billion boe which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”