INVESTMENT in Britain’s oil and gas industry has soared to record levels on the back of the UK government’s sweeping tax reforms for the offshore sector and is set to keep growing this year, according to the latest industry report.
Last year, oil firms invested £11.4 billion in the North Sea and the waters west of Shetland, encouraged by new tax breaks and assurances on decommissioning costs.
And investment in an industry which supports 440,000 British jobs is set to rise to at least £13bn this year, according to a report by trade body Oil & Gas UK published today.
The projects approved in 2011 and 2012 alone will over time produce more than two billion barrels of oil and gas, generate £100bn value for the economy and an additional £25bn in production taxes for the Exchequer.
The report blamed “a decade of fiscal instability” for warding off investors and causing a fall in production from UK waters. Last year production fell 14 per cent to an average of 1.55 million barrels of oil equivalent (boe) per day. That follows a record collapse in North Sea oil production of 18 per cent in the previous 12 months.
Investments totalling almost £100bn are now in companies’ plans, according to the survey, although it will take at least another year for the investment to filter through into increased production. The investment is set to lead to a significant turnaround in production, rising to two million boe by 2017.
Malcolm Webb, chief executive of Oil & Gas UK, said: “After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf is now benefitting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades.
“The recent introduction of targeted tax allowances to promote the development of a range of difficult projects, coupled with the government’s ground-breaking commitment to provide certainty on decommissioning tax relief, has prompted global companies and independent businesses alike to take another look at the UK as an investment destination and resulted in a new wave of investment. It is crucial that we sustain this momentum.”
However, the report also acknowledged that the record investment figure also reflects the rising costs of exploring and drilling in UK waters, both as a result of inflation and the increasing difficulty of accessing the remaining reserves. Despite the higher oil price, every pound invested in the North Sea this year is expected to yield only one-fifth of the return seen in 2002.
The report says the current price of Brent crude – well above $100 a barrel – provides a buffer for companies, but many fields are “exposed and could be rendered uncommercial” in the event of a sharp dip in oil prices.
Webb also warned that, despite the dramatic surge in investment plans, challenges remained for Britain’s most buoyant industry.
Reserves moving through into production have not been fully replaced with new discoveries.
However, he was encouraged by the pick-up in exploration. There are already 50 potential new field developments on the books with potential reserves of almost three billion barrels.