The trade body for the UK’s oil & gas sector called for “radical” changes in the tax system as a new report revealed North Sea costs have risen 60% in just three years.
Oil & Gas UK, which published its Economic Report for 2014, said last year’s record expenditure of £26billion in the North Sea, including capital investment of £14.4billion, has resulted in a small uptick in production this year so far, turning around several years of decline.
But unit operating costs rose to an average of £17 per barrel of oil, with the number of North Sea fields with operating costs of £30 per barrel doubled in 2013.
Costs were such that post-tax cash flow was negative for the first time in 22 years which the body branded as “not sustainable” in the longer term.
Michael Tholen, Oil & Gas UK’s economics director, called on Westminster to take action on tazes : “We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration.
“The outcome of the Fiscal Review, expected to be announced in December this year, must be relevant, radical and robust.”
The report said that “few” investments in the North Sea can proceed at the current tax rates of 62% and 81%, adding that field allowances were “essential” to keeping investors confident after the UK government’s 2011 windfall tax on the sector.
Malcolm Webb, chief executive of O&G UK said: “Full implementation of Sir Ian Wood’s recommendations for regulatory reform, and far-sighted changes to the fiscal regime, are needed in the next 12 to 18 months to stimulate new investment in exploration and production.
“Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency.
“The magnitude of the task ahead means that over one trillion pounds of expenditure (in 2013 money) will be required if the recovery of above 20 billion boe is to be achieved.
“However, the UK has to complete for each and every pound of that investment. If the current trend of rising cost continues, the UKCS will cease to provide a healthy return on investment and we’ll feel the brunt through falling levels of activity.
“Our industry makes far too important a contribution to the economic and energy security of the nation to be allowed to falter at this critical point.”
By Erikka Askeland