North Sea oil tax breaks to ‘enhance’ output

TAX breaks for the oil industry introduced by Chancellor George Osborne should lead to a “substantial enhancement” of output from the North Sea, according to Aberdeen University economist Alex Kemp.

A North Sea oil well. Picture: AP
A North Sea oil well. Picture: AP

In a study published today, Kemp and his colleague, Linda Stephen, found that the rate of return for companies drilling for oil and gas in British waters had dipped in recent years but still remained “worthwhile.”

The researchers studied rates of return from 2003 to 2012.

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In the latest in a series of academic papers stretching back to 1973, they concluded that investors in a full tax-paying position at the time of exploration and appraisal have had an advantage compared to those not currently paying full tax.

This advantage has narrowed considerably since the Chancellor’s tax breaks were introduced in January 2012.

Kemp said: “The various field allowances for supplementary charge substantially increase investment incentives on the very high-cost per barrel discoveries.

“In the long run, they should cause a substantial enhancement to production and should help to modify the lower expected returns from the exploration effort incurred in recent years.”

His comments follow last week’s annual economic report from trade body Oil & Gas UK, which predicted that capital investment in the North Sea will hit a record £13.5 billion this year, up from £11.4bn last year.

Yet the report also laid bare the continuing falls in output from the North Sea, as producers spend more and more cash squeezing out the oil and gas that remains.

According to the report, the record 19 per cent fall in production in 2011 was followed in 2012 by a production decline of 14.5 per cent to 567 million barrels of oil equivalent (BOE) or 1.54 million BOE per day.

North Sea production is now at its lowest level since 1977. Production problems on ten large fields accounted for 37 per cent of the reduction.

Oil and Gas UK’s updated forecast is for production to be in the range of 1.2 to 1.4 million BOE for 2013 overall.