British Gov. Puts North Sea Oil On Life Support

The United Kingdom is moving quickly to resuscitate its dying oil and gas sector, slashing taxes on the industry in order to make the UK more competitive.

The British oil and gas industry has been arguing for quite some time that the tax regime is too burdensome, citing taxes of up to 80 percent. The industry has to pay a 30 percent corporate tax, plus a 30 percent supplementary tax, and a variety of other energy related taxes. Combined, the industry says, the tax system stifles production and pushes companies to look abroad for business.

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Add to that the fact that North Sea oil and gas is mature, declining, and expensive. Producing in the harsh conditions off the northern coast of the British islands is not an easy – or cheap – proposition.

British oil and gas production has been declining for years, but the severe drop in oil prices presented the sector with an existential crisis. The oil majors that operate in the North Sea – Royal Dutch Shell, BP, Chevron – have committed to significant cuts to their capital expenditures. They have reviewed the highest cost production in their global portfolios, and concluded that the North Sea should be on the chopping block.

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As a result, fears of permanent decline have set in. Without action an estimated 100,000 jobs could be lost. The British government hopes to stave off the worst, and unveiled a rescue package on March 19. The supplementary tax will be reduced from 30 percent down to 20 percent. A separate petroleum tax on older oil fields will be slashed down to 35 percent from the current 50 percent. All told, the tax cuts will cost the British government 1.3 billion pounds through 2020. The CEO of Oil & Gas UK, an industry trade group, said the tax cuts “laid the foundations” for a revival of the North Sea.

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If all goes according to plan, the rescue package could boost oil and gas production in the UK by 15 percent and incentivize an additional 4 billion pounds in investment by the end of the decade.

The most significant variable in the industry’s survival in the UK is the price of oil, which would need to rebound to much higher levels to ensure continued operation in the North Sea. But that is not something the British government can control.

By Charles Kennedy for Oilprice.com

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