More British tax increases for North Sea oil?

Tim Haïdar

As oil reserves and production rates in the North Sea head further into decline, mature fields are an ever-growing concern.

Ageing assets make operators' overall strategy and use of technology ever more important, with oil companies fighting to retain and develop their output.

Facilities in mature North Sea fields are being pushed well beyond their original lifespan, making asset integrity management strategies more crucial than ever.

On top of this, oil firms now face substantially bigger tax bills as a result of changes announced in the 2011 Budget. Could this spell disaster for struggling mature fields?

George Osborne's annual Budget statement, full details of which emerged on March 23rd, means that Britain's motorists will not immediately be required to pay more for their fuel, despite inflation and rising oil prices. But the chancellor's controversial decision may have come at a considerable cost to the already-declining North Sea oil industry.

Its future, which most would agree is absolutely vital to the UK economy, could be in serious doubt. The announcement of a levy increase, taking the government's windfall tax on North Sea oil and gas producers from 20 to 30 per cent, has sent shockwaves through the industry. Mr Osborne claimed that the tax hike had been necessary to fund his 1p reduction in fuel duty.

Speaking to the Guardian, James Smith, UK chairman of oil giant Shell, dismissed suggestions that consumers may end up paying back the extra cost of the tax - expected to raise as much as £10 billion - describing them as "nonsense".

He said that the industry would be unable to pass on its additional costs because of the way in which oil prices are set globally. Mr Smith noted how North Sea production costs had only a modest bearing on the international equation. And it appears he is not the only expert who thinks this way.
Derek Leith, oil and gas partner at Ernst & Young, added: "This is an internationally traded commodity. These taxes in the UK will not affect the price."

As a result of the higher tax, companies are likely to be less able to exploit what is left in the North Sea's vast oil fields, which could have knock-on effects across the UK economy as a whole.

Oil and gas from the North Sea accounts for a huge proportion of British economic output, with over 500,000 jobs bringing in more than £30 billion each year. But as reserves in the North Sea's mature fields have dried up, Britain has become a net importer of fuel.

While dwindling reserves and ageing assets render mature North Sea fields less productive, advances in seismic geology and new engineering techniques have made the remaining oil accessible. Such advances have helped a second-generation North Sea oil industry to emerge.

This mainly consists of specialist companies seeking new, smaller fields that have historically been ignored. As an immediate consequence of the chancellor's Budget announcement, many of these smaller firms, including Valiant Petroleum and EnQuest, watched as their share prices plunged.

The implications of a greater tax burden have not gone unnoticed by the world's largest oil companies, however. ConocoPhillips, BP and ExxonMobil are currently all in negotiations over the sale of existing assets. As a consequence of the tax hike, the financials surrounding these deals will likely have to be re-evaluated.

Finally, one of the most important things to remember about the charges imposed on the North Sea industry is that the rates companies pay are already very high and mature fields are those which carry the heaviest tax obligation.

Operators in fields opened prior to 1993 would previously have paid 75 per cent in tax, but this is rising to 81 per cent. Meanwhile, producers with fields opened later than 1993 and were being charged 50 per cent, will now owe 62 per cent.

Although oil in the North Sea is admittedly in decline, there are still vast reserves to be recovered. In fact, Shell chairman Smith puts the total value of untapped North Sea oil at an estimated £1 trillion.

However, there is now a very real danger that if oil firms will not be able to generate the ample profits to keep their shareholders happy and the opportunity may have been missed. At the moment, it remains a guessing game as to where that will leave the UK economy.