Oil & Gas UK warns investment ‘collapsing’

Investment in new oil and gas projects in the North Sea is “collapsing”, according to a new report. Oil & Gas UK said the industry is expected to approve less […]

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By Priyanka Shrestha

Investment in new oil and gas projects in the North Sea is “collapsing”, according to a new report.

Oil & Gas UK said the industry is expected to approve less than £1 billion of spending on new projects in comparison to a “typical” £8 billion a year in the last five years.

It adds exploration remains at an all-time low “with no sign of improving” and warns production could halve by 2025 if companies don’t spend enough money.

The trade body claims if the current oil price continues through 2016, 43% of UKCS oil fields are likely to be operating at a loss despite significant cost reductions.

Operating costs have dropped by a third from an average of $29.30 (£20.8) per barrel of oil equivalent (boe) in 2014 to $20.95 (£14.8)/boe last year. That was supported by a 10% rise in oil and gas production – the first in 15 years.

Costs are expected to fall by a further 20% this year to around $17 (£12)/boe.

However, the trade body said pressure on the sector has grown as prices have continued to fall. It found revenues fell by 30% to £81.1 billion last year despite the rise in production to around 1.64 million boe per day.

Total capital spending fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further to around £9 billion this year.

Oil & Gas UK is calling on the government for urgent reforms of the special taxes paid by the industry to attract investment and minimise loss of capacity.

Chief Executive Deirdre Michie, said: “The industry currently pays special taxes at a headline rate of 50% (67.5% for fields paying Petroleum Revenue Tax). A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years. Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”

The report states the UKCS still holds up to 20 billion boe.

The government said it is “100% behind our oil and gas industry”.

A spokesperson added: “We have established the Oil and Gas Authority to drive greater collaboration and productivity within industry and announced a radical £1.3 billion package of tax measures in the March 2015 Budget to ensure the UKCS remains an attractive destination for investment and safeguard the future of this vital national asset.

“In January this year we announced a further package of measures including another £20 million funding for a further round of seismic surveys and our strategy to maximise economic recovery of the UKCS. We look forward to the industry capitalising on this, to deliver efficiencies and make the industry more robust now and for the future.”