North Sea oil and gas sector ‘a net drain on UK finances’

Oil rigs laid up in the Cromarty Firth in 2016. The sector has been rocked by a collapse in prices in recent years. Picture: Andrew Milligan/PA Wire
Oil rigs laid up in the Cromarty Firth in 2016. The sector has been rocked by a collapse in prices in recent years. Picture: Andrew Milligan/PA Wire
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The North Sea oil and gas industry was a net drain on UK public finances for the first time last year, an industry report has found.

The slump in oil prices meant the sector received £396m in 2016, net of tax payments. This is the first year that the North Sea industry has cost the exchequer more than it has contributed, analysis by Carbon Brief found.

The industry’s contribution to the exchequer was £10 billion as recently as 2011.

In total, the sector has contributed in the region of £190bn in tax revenues since the 1960s.

Despite incentives for exploration and the discovery of new oil and gas fields in recent years, the sector is no longer “the cash cow” chancellors have come to expect, the report said.

Energy companies can claim rebates on the cost of decommissioning rigs and pipelines as fields come to the end of their natural life.

The report added: “Since the government passed the Continental Shelf Act in 1964, billions of barrels of oil and gas have been extracted from reserves under the North Sea.

“Now, some of the largest fields are coming to the end of their life. The rigs, pipelines and other infrastructure built to exploit them must be safely decommissioned. Cleaning up this legacy will cost an estimated £47bn out to 2050, according to the UK’s Oil and Gas Authority (OGA).”

“Companies can reclaim tax paid in previous years, in order to cover this spending. Oil prices are still far below recent highs and the government has introduced generous tax breaks, worth £2.3bn, designed to encourage new investment in the North Sea.

READ MORE: Remaining North Sea oil ‘less than half’ 2014 SNP prediction

“Meanwhile, estimates of the total cost of decommissioning are highly uncertain, with the OGA giving a range of plus or minus 40% on its £47bn figure. One 2016 study said taxpayers could face a £75bn bill. Other studies have speculated that the costs could wipe out all future North Sea tax revenues, potentially damaging the economic case for Scottish independence. As the Financial Times noted in January, the North Sea industry “risks becoming a net drain on UK resources as it enters its sunset years”.

“Having reached highs of £12bn revenue in some years, this moment has already arrived, with the North Sea for the first time becoming a net drain on the public finances and costing £0.4bn (£396m) in calendar year 2016. Future revenues are uncertain, see below. Either way, the sector is no longer the cash cow chancellors have come to expect over the past several decades.”

A HM Treasury spokesperson said: “The UK has one of the most competitive tax regimes in the world for oil and gas, and we have provided £2.3 billion of support to the industry over the last two years alone to support investment and jobs.”

North Sea oil has long been a central pillar of the SNP’s economic vision for an independent Scotland.

But the amount of North Sea oil still to be extracted is less than half of the figure the Yes campaign predicted ahead of 2014 independence referendum, an industry expert said in March.

Professor Alex Kemp of Aberdeen University predicted 11 billion barrels of oil equivalent (boe) could be recovered from the UK continental shelf from 2017-2050, using a “lower for longer” price modelling system.

The Scottish Government’s white paper on independence, published in 2013, said 24 billion barrels were recoverable.