Editorial: An Industry In A Box
"Finito il gioco il Re e il pedone tornano nella stessa scatola"
"When the game is over, the King and the pawn go back in the same box" – Italian proverb
After an eight month rout in which oil prices collapsed by some 60 per cent, it seems that an abridged rally is now over as West Texas Intermediate fell to its lowest value in six years.
On the eve of British Chancellor George’s Osborne’s 2015 budget speech, Brent crude pointed at $53 per barrel after a slight rebound from its dramatic plunge of $107 to $45. When the Chief Financial Officer of UK plc lifts his battered briefcase for the cameras and commends his budget to the House, it will be a defining moment for a British oil and gas sector that is more under the kosh now that at any time in a generation.
In the UK, the oil and gas sector employs more than 400,000 people and is worth in excess of £35 billion ($52 billion) per annum to the national economy. But the recent history of production in the British Isles has been a story of decline. In 2009, onshore and offshore assets were outputting 2.41 million barrels of oil equivalent per day (mmboe/d). In 2014, it was 46 per cent of that amount at 1.11 mmboe/d.
Last year also saw the lowest deal count since 2009 and the fewest amount of wells drilled on the UK Continental Shelf (UKCS) since the 1960s. At £24 billion ($35 billion), revenue was the lowest since 1998.
It is likely that alleviation for the industry will come in the form of tax relief - a headline cut to the supplementary corporation tax charge paid by oil companies on top of the standard 30 per cent corporation tax rate. This supplementary charge currently stands at 30 per cent, and interest groups are plumping for a ten per cent rebate to return it to pre-2011 levels. Crucially, Brent crude averaged $111 in 2011, more than twice the current price.
According to Oil & Gas UK, the offshore industry was $8.6 billion in the red after tax deductions in fiscal year 2014. The famed Wood Review has cited a figure of £94 billion of investment to extract the remaining 10 billion barrels of proven reserves left beneath the UKCS. If this is going to attain some kind of tangibility in a low oil price environment, tomorrow’s budget will have to play a starring role. If not, that little red box may contain two pawns….
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