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Industry 'activity survey' shows urgent need for tax intervention, says Oil and Gas UK


Oil and gas exploration projects in the North Sea require £94 billion in investment if the equivalent of an estimated 10 billion barrels of oil (boe) is to be successfully recovered, according to an industry report.

An annual 'activity survey' of exploration and production companies operating on the UK Continental Shelf (UKCS) found that revenue from projects fell to just over £24 billion last year as a result of falling oil prices – the lowest level since 1998. This, combined with record production costs of £18.50/boe, meant that the industry spent £5.3 billion more than it made last year, leaving it in its worst financial position since the 1970s, according to industry body Oil and Gas UK.

Oil and Gas UK chief executive Malcolm Webb said that the report painted a "bleak picture" of the sector, with planned investment projected to fall still further in 2015. He said that the findings highlighted the need for urgent government action on rising costs, tax rates and an inadequate regulatory regime.

"Without sustained investment in new and existing field, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground," he said.

"Even at $110 per barrel, the ability of the industry to realise the full potential of the UK's oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation. At current oil prices, we now see the consequences only too clearly. The basin needs sustained, high investment. This is why a concerted effort on three fronts is needed - tax, regulation and cost - to make the basin more attractive to investors and ensure that significant sums of much-needed capital come to the UK," he said.

The survey found a lower than expected fall in production to an average of 1.42 million boe per day in 2014; the industry's best year-on-year performance since 2000. According to the report, this was largely the result of investment in new project start-ups made feasible by the government's targeted tax allowances, and a specific cross-industry focus on improving efficiency in existing fields. According to the report, up to 15 new fields could begin production this year and ultimately result in a production increase to around 1.43 million boe per day in 2015.

Capital investment rose to £14.8bn in 2014, primarily due to cost over-runs and project slippage. However, projected investment is expected to fall in 2015 to between £9.5bn and £11.3bn, according to the report. Only 14 out of the 25 expected exploration wells were drilled in 2014; and between eight and 13 wells are planned for 2015, the report said.

The UK government is due to finalise a planned 'basin-wide investment allowance', designed to reduce the effective tax rate for companies investing in the future of the UKCS, alongside next month's Budget. However, the oil and gas industry has repeatedly called for simplification of the tax regime overall, including a reduction in the headline rate of corporate tax paid by firms on their profits.

"The industry is taking measures to improve its cost efficiency and we are pleased that even before the steep fall in oil price, the government took the important steps of implementing the Wood Review recommendations and conducting a comprehensive tax review," said Malcolm Webb.

"The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline," he said.

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