North Sea industry body, Oil & Gas UK, has appealed to the United Kingdom government to abolish a 30% charge on oil and gas producers as oil fell to its lowest prices in nearly six years.
The body says oil and gas producers in the basin are unable to cover their costs at $50 a barrel. Brent, which peaked at $115.06 in June, dropped to $47.64 a barrel on the London-based ICE Futures Europe exchange.
What’s more, according to data from Wood Mackenzie, at an oil price of $60/barrel, 95% of pre-sanction oil and gas reserves in the UK generate less than a 15% return on investment and, with sustained low oil prices.
Malcolm Webb, Oil & Gas UK’s chief executive, said: “With a significant amount of UK oil and gas production not even covering costs at a $50 oil price, the industry cannot carry the burden of a tax rate between 60-80%.”
The UK Government has already pledged to simplify the tax regime, but, says Webb, this is now not enough.
“Evidence of the threat from the falling oil price to UK investment and jobs is mounting daily with oil and gas companies cutting exploration and capital budgets and reviewing headcounts,” he says. “The credible and reasonable response for the Chancellor in his upcoming Budget, assuming the oil price has not recovered by then, is the abolition of the 30% supplementary charge on corporation tax, which was introduced and then increased in direct response to rising oil prices, most recently in 2011. This would still leave oil and gas producers paying corporation tax at 30%, a tax rate 50% higher than the rest of British industry,” Webb noted.
The pain in the UK industry follows a year of record spending in 2014, at $19 billion pumped into capital projects, according to Wood Mackenzie.
Despite a string of steep production declines, UK production stabilized in 2014 and is even expected to grow in the near term. However, rising costs, poor exploration results and falling oil prices squeezing already tight project economics – have cast further concern over the outlook for 2015 and beyond, the firm says.
Erin Moffat, UK Upstream Senior Research Analyst for Wood Mackenzie, says: “The high cost environment in the UK meant that project returns were already subject to increased scrutiny during 2014. The dramatic fall in oil price towards the end of last year only adds to this.
“At an oil price of $60/barrel, 95% of pre-sanction oil and gas reserves in the UK generate less than a 15% return on investment. This has intensified concerns over future UK Continental Shelf investment as further cuts or delays to projects are likely. A low oil price could also impact producing fields with high operating costs, with the potential for shut-ins. We estimate $3.2 billion (£2.0 billion) of spend associated with pre sanction projects could be at risk over the next two years as a result of current oil prices. Without this, UK Upstream spend in 2016 would be around US$10 billion (£6.3 billion) – just over half of 2014 levels.”
There have been signs that US onshore production is slowing, with the US onshore rig count falling, which analysts suggest could stem the oversupply of oil on the market, which, combined with weaker demand from Asia and Europe, has caused prices to fall. But, a report by Goldman Sachs analysts said that the oil price would need to fall to $40/barrel for six months to slow.
Source : Independent