Tax breaks & co-operation needed to help North Sea oil

North Sea oil industry leaders have called for Norwegian-style tax breaks for exploration and more co-operation between companies to cut costs and help stave off decline.

Oil industry wants more help from,Chancellor George Osborne, who visited the Montrose platform in the North Sea this week. Picture: Getty

Now in its fifth decade of pumping oil and gas, for the oil and gas industry in the North Sea, finds tend to be small and costly, while old platforms and pipelines need more maintenance, cutting output and profits.

The UK government has sought to cushion the blow of a shock tax hike on producers in 2011, introducing tax breaks for revamping older fields and some new assets that are harder to develop. It has also launched a review of the North Sea to maximise the industry’s economic benefits.

Investment is forecast to reach a record £13.5 billion in 2013, as much as £6bn more than two years ago, and production is expected to pick up in 2015, but the picture is less clear beyond that horizon.

Lindsay Wexelstein, an analyst at energy consultancy Wood Mackenzie, said: “At the moment, we don’t see this level of investment carrying on post-2016. For spend to be at the level it is now, we do need to see more exploration success.”

Prolonging the North Sea’s life in the longer term will require a flexible tax regime, said company bosses at the Offshore Europe exhibition in Aberdeen, the oil capital of Europe. Andrew Gould, chairman of BG Group, said: “Given the maturity of the North Sea, it will be increasingly important to adapt fiscal policy to different activity types.”

Tax relief on enhanced oil recovery – an expensive technique that involves pumping associated gas back into oil fields to raise the recovery rate – could lift volumes, said Malcolm Webb, chief executive of industry body Oil & Gas UK, adding that only about half the oil in any field is now extracted before it is shut down.

Graham Stewart, chief executive of Faroe Petroleum, said a tax-based exploration incentive like one operating in Norway since 2005 would help promote new finds. He added: “Norway took a gamble and it paid off for them. I believe some similar arrangement could work here.”

Oil & Gas UK estimates that up to nine billion barrels of oil equivalent are yet to be found off Britain, which produces 0.2 per cent of the world’s oil and 1.2 per cent of its gas, but small operators want more help over tax.

Sir Ian Wood, former chairman of Aberdeen-based oil services giant Wood Group, is leading the government-commissioned review of the North Sea, the first in more than 20 years, but the report will not make recommendations on taxation.

However, encouraging more collaboration between companies is one area where the review could help the industry.

Marcus Richards, chief executive of Aberdeen-based Dana Petroleum – which was bought by Korea National Oil Corporation in 2010 for £1.87bn – said companies need to start working together to bring down their supply chain costs, as they do in the Gulf of Mexico.

He said: “An example would be a company which runs logistics across the North Sea and has multiple service partners. What you do is a bus run instead of a bespoke trip from shore to the offshore facilities.”