Tax hike "devalues" UK assets

Jeremy Beckman • London

Higher petroleum taxes imposed since March are already impacting UK offshore field development. According to a survey by industry association Oil & Gas UK, the changes could accelerate the sector's production decline by 1.5%/yr, and reduce planned investments by $1.6 billion/yr.

Chancellor George Osborne's unexpected budget changes in March raised headline tax rates on UK offshore production to between 62% and 81%, depending on the field's age. The government also decided to restrict tax relief on decommissioning, now capped at 20% against the 32% Supplementary Charge (SC).

Oil & Gas UK's survey compiled data supplied by 27 oil companies, responsible for 85% of the UK's production and with current investment plans in close to 240 potential projects. The findings suggest that the SC increase immediately eroded the value of all prospective UK offshore investments by around 23%.

Potential impact on UKCS investments before and after the recent tax changes (Source: Oil & Gas UK).

The budget has reduced the likelihood of 60 projects going forward, collectively accounting for total capex of $35.7 billion. And in the case of 25 projects, the probability of proceeding has fallen below 50%. Based on existing plans, this suggests that around $19.5 billion of investments are at risk.

As for mature UK fields paying petroleum revenue tax – many of which are important infrastructure hubs – the 81% tax rate is too high to sustain continued investment. This will accelerate decommissioning and cut reserves recovery.

Oil & Gas UK is continuing dialogue with the government on mitigation measures, including extending allowances to lessen the tax burden on new field investments. It has also called for consultation on all future changes to Britain's North Sea regime, to avoid deterring new investors from committing to the UKCS.

Ekofisk extension goes ahead

Norway's parliament has formally approved two major development projects in the North Sea, with combined investments of over $15 billion.

ConocoPhilips' Ekofisk South and Eldfisk II schemes will exploit a further 450 MMboe of reserves on the Ekofisk and Eldfisk fields, and keep the Greater Ekofisk Area in production for several more decades. Ekofisk was Norway's first producing oil field when it came onstream in June 1971.

The program for Ekofisk South is based on a new 36-slot wellhead platform, 2/4 Z, capable of producing 70,000 boe/d, and bridge-linked to the existing Ekofisk complex. This will be supplemented by a seabed facility (2/4VB) gathering eight water injection wells. Start-up is scheduled for late-2013.

Eldfisk II calls for a new integrated wellhead, process and living quarters platform, Eldfisk 2/7 S, which will be connected to the Eldfisk field complex. ConocoPhillips expects to drill 40 production/water injection wells from 2/7 S, which will also help extend the service life of existing platforms on the Eldfisk and Embla fields. The new facilities should enter service in 2015.

Statoil's Valemon is one of the company's larger current Norwegian projects. Most of the main contracts had been issued ahead of the official sanction, the most recent being the construction awards to Samsung for the platform's topsides and to Hertel Marine for the living quarters – Heerema Vlissingen in the Netherlands is building the steel jacket. The field's 26 bcm (919 bcf) of gas will be sent through the Huldra field pipeline to the Heimdal complex for onward transportation to markets in Europe. Valemon's condensate will head through another pipeline to the Kvitebjorn platform for stabilization before being delivered to the Mongstad refinery on Norway's west coast.

Norway needs new pipelines

Around 200 bcm (7 tcf) of gas from Norwegian fields could be developed between now and 2020, claims gas transportation operator Gassco. But this will require expansion farther north of Norway's offshore pipeline network.

One of the main projects under review is a new pipeline from Statoil's stranded Luva field in the Norwegian Sea to facilities at Nyhamna, which currently process supplies from the Ormen Lange development. According to Gassco, 11 companies are sponsoring the Luva pipeline studies, with the concept due to be selected this fall, followed by a final investment decision in late-2012. The maximum water depth of the proposed 480-km (298-mi) pipeline would be 1,300 m (4,265 ft), the deepest yet for an export system on the Norwegian shelf.

However, Gassco CEO Brian Bjordal advised caution over longer-term transportation planning: "There is uncertainty related to [Norway's] resource potential post-2020, and field development in new areas will require a coordinated approach to the infrastructure development."

Over time, more options may open in the eastern Norwegian Barents Sea, now that Norway and Russia have agreed on a treaty concerning maritime delimitation in this region and the Arctic Ocean. PGS'Harrier Explorer vessel was due to start seismic acquisition in the eastern sector this month, under a program commissioned by the Norwegian Petroleum Directorate.

SolveiG buys into Gassled

Statoil and Total both have sold stakes in Norway's Gassled joint venture to SolveiG Gas Norway for a total of more than $4 billion. Gassled owns the gas transportation grid and processing facilities taking gas from Norwegian fields through long-distance trunklines to the UK and mainland Europe. SolveiG is a holding company for three investment groups. Following the sale, Total is out of Gassled altogether, while Statoil has retained a 5% interest. However, both companies have re-affirmed their commitment to gasfield development and production on the Norwegian shelf.

These exchanges headed a spate of recent transactions in the North Sea. Tullow Oil agreed to pay $430 million to Vattenfall Group for Nuon, which has Dutch sector production of 9,000 boe/d. Faroes-based Atlantic Petroleum bid successfully for UK southern North Sea specialist Volantis Exploration, and Valiant Petroleum made an offer for Norwegian company Sagex Petroleum, which has interests offshore Norway, the UK, and the Faroe Islands.