UK industry needs further incentives, association says

Production on the UK continental shelf averaged 2.2 MMboe/d last year, according to Oil & Gas UK’s 2011 Economic Report.

Offshore staff

LONDON – Production on the UK continental shelf averaged 2.2 MMboe/d last year, according to Oil & Gas UK’s 2011 Economic Report.

This figure satisfied around 90% of the UK’s oil demand and 60% of its gas demand.

The report also claims that the industry spent $22 billion on exploration, development and operations in the UKCS during 2010. This included $9.4 billion of investment in new projects, up by around 20% on the total outlay during 2009.

Malcolm Webb, Oil & Gas UK’s Chief Executive, said: “Our Economic Report shows how the UK fabrication and well services sectors in particular are flourishing.”

He added: “Forecasts prepared at the start of 2011 showed that investment to develop UK oil and gas was set to increase dramatically to £8 billion ($12.6 billion) in 2011 and be sustained at that rate for the next five years. If the investment planned then was realized, over 40% of our primary energy demand or 60% of oil and gas demand could still be satisfied from these resources in 2020.”

However, Oil & Gas UK points out that the industry’s confidence was shaken by the tax rises in this year’s budget to a new top rate of 81%, with access to tax relief on decommissioning costs being capped at old tax rates.

This reduced the value of projects by almost a quarter, the association adds, wiping out the positive effect of new field allowances put in place by the UK Treasury to encourage investment in technically challenging, small or remote fields.

The average size for new UKCS discoveries is small, Webb pointed out, at around 20 MMbbl, “yet development costs are high. A heavy tax rate, especially for projects involving additional investment in mature fields, and greater uncertainty over future tax treatment, has not helped the industry’s case in proving attractive to international investors. Transfer and trading of equity in older assets has also slowed to a trickle.

“Developments where investment is already committed or where the reserves are material and the economics sufficiently robust to withstand the tax increase, will go ahead. However, for those making investment decisions on economically marginal projects in the medium and longer term, the UK will now appear lower down the international rankings as a destination for their capital.

“What we now see is something of a ‘two speed UKCS’ whereas what is really needed for the economy and energy security is every effort to push along investment in all technically viable projects. As a result, Oil & Gas UK is working closely with the Government to find a way to stimulate investment in developments which are now ‘fiscally stranded’. We believe that the current field allowance structure will need to be extended or modified to sustain investment in existing and new fields, especially the more difficult or marginal ones.”

Webb added: “Oil & Gas UK has been working alongside Treasury officials to find ways to stimulate investment in existing fields and to develop proposals to resolve the current uncertainty over access to decommissioning tax relief. We have been encouraged by the constructive engagement of the Treasury, Ministers and officials in both projects and we hope to identify a much-needed solution by the Budget of 2012.”


More in Regional Reports