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Oil industry needs tax breaks to avert slump

February 12, 2009

Carl Mortished, World Business Editor

The UK oil industry has asked the Government for tax breaks to prevent a collapse in drilling activity in the North Sea that could lead to the loss of up to 50,000 jobs in Britain.

Oil industry lobbyists have met Ed Miliband, the Energy Secretary, to alert the Government to the likelihood of a sharp fall in North Sea investment this year because of the collapse in the oil price and a lack of funding from banks for offshore projects.

Figures from Oil & Gas UK, the North Sea industry association, suggest that the number of wells drilled in the North Sea could be a third of last year’s total of 109. The association said: “A year ago, it was anticipated that up to 113 wells could be drilled in 2009, whereas the latest survey predicts 77 wells, of which only 34 have a committed drilling rig.”

Malcolm Webb, the association’s chief executive, fears that the fall in the oil price, the lack of funding and high taxes will lead to a halving of investment from last year’s £5 billion. He said: “There are about 20,000 jobs relying on each billion pounds of capital expenditure. That’s about 50,000 jobs [potentially at risk] in the North Sea and the supply chain.”

In a meeting with Mr Miliband, the association asked the Government for help in improving the flow of bank capital to exploration companies and for changes to the tax system that would let smaller operators benefit more quickly from tax losses incurred on North Sea investments.

Mr Webb said that the oil industry wanted Britain to emulate Norway’s tax system, which provides generous capital allowances that favour high levels of exploration investment.

The credit drought is hitting Britain’s North Sea oil industry, in which much of the new exploration is driven by smaller operators. According to Oil & Gas UK, the industry is targeting reserves of just under 10 billion barrels with 56 new field developments, but half contain less than 15 million barrels, quantities that are too small to interest big groups such as BP or Shell. Instead, the Government has encouraged an influx of smaller players, many from North America, and these are suffering from lack of finance.

The sudden fall in the oil price from last year’s peak of $147 a barrel to $44 for Brent crude has wrecked the economics of most North Sea investment, according to Mike Tholen, economics director for Oil & Gas UK. He said: “The breakeven oil price for new field investment is now over $40 per barrel. Only a third of new developments now under consideration break even at current costs and at a $50 oil price.”

Meanwhile, the cost of operating on the UK Continental Shelf has risen sharply. Although commodity costs, such as steel prices, are expected to fall this year, the cost of labour is unlikely to come down quickly.

The day-to-day operating cost of producing a barrel of oil in the UK is $13, while the capital investment required averages $16 a barrel. Add exploration costs, funding costs and corporate overheads and the cost of a UK barrel of oil is $40 to $50, which is uncompetitive when tax rates for oil companies are 50 to 75 per cent. North Sea oil companies paid the Exchequer about £13 billion last year. Mr Webb said: “We are very hopeful we will hear something in the Government’s Budget.”

North Sea investment has been falling from a peak of £5.6 billion in 2006 to £4.8 billion last year despite oil prices rising in that period. Mr Webb says UK investment must be £5 billion a year if the decline in UK oil output, currently 5 per cent a year, is not to accelerate.

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