Drilling activity halved since tax hike

DRILLING activity in UK waters halved during the last three months as the coalition government's surprise tax hike began to dent business confidence in the oil and gas sector, a report will today claim.

The research comes despite BP's announcement yesterday of a 3 billion investment in its Schiehallion and Loyal oil fields to the west of Shetland, which will extend production to at least 2035.

Just 11 exploration and appraisal wells were "spudded" during the three months to 30 June, down 52 per cent year on year, according to accountancy firm Deloitte's north-west Europe review.

In the first six months of the year, 20 wells were drilled, a 43 per cent year-on-year fall - and the lowest level of activity since 2002. Deloitte warned that activity was lower than would be expected when oil is above $100 a barrel. The firm noted that the average "Brent blend" price rose almost continuously from 2009 until April and that many of the world's major economies have begun to stabilise following the global recession of 2008.

Deloitte said the negative trend was not reflected everywhere in the continental shelf, with Norway recording a 10 per cent increase on its second- quarter average for the past decade, while the Netherlands had reported consistent drilling levels for the year to date compared to 2010.

Graham Sadler, managing director of Deloitte's petroleum services group, said: "The reduction in activity is concerning, and is likely to be attributable to a combination of issues, including a lack of business confidence in the market generally, over recent months, as well as a possible initial reaction to the UK's shifting fiscal regime.

"Although it is difficult to pinpoint how quickly companies would have been able to change drilling plans, as a result of the tax changes announced in this year's Budget, it's quite likely that the UK fiscal regime is now being viewed as unstable and, therefore, a less-attractive place to invest."

Sadler added: "While there have been some positive announcements during Q2, such as the increased ring-fence expenditure supplement, we would not expect to see the full impact of these tax changes for at least another six to 18 months."

In March, Chancellor George Osborne used his Budget speech to unveil an increase in supplementary corporation tax for the oil and gas industry, a move derided by businesses in the sector.

A number of companies, including Centrica and Statoil, announced the temporarily closure of fields or the postponement of development projects as a result of the tax hike.Last month, the Chancellor raised the ring-fence expenditure supplement from 6 to 10 per cent, in a move seen as a concession to the industry.

Graham Hollis, energy partner at Deloitte in Aberdeen, said: "While two deals were announced, the proposed reorganisation of EnCore did not go ahead, with the company stating the decision to cancel was made in light of the market conditions which have been exacerbated by the uncertain investment climate created following the recent tax changes in the UK."

l Xcite Energy, the Banchory-based oil and gas producer, yesterday revealed that construction of the Rowan Norway rig, which will be used on its Bentley field, has been completed in Singapore and the rig will be moved to Dundee for final testing.