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    Oil & Gas UK Survey highlights urgent need for industry-government engagement

    News // June 1, 2011

    The results of Oil & Gas UK’s updated Activity Survey reinforce the need for the Treasury and the industry to move ahead swiftly to find ways to rebuild investor confidence and to reduce the impact of the unexpected tax change announced in the 2011 Budget.

    The research shows that unless mitigating measures are soon put in place, at least 25 projects which account for over a billion barrels of oil and gas and investment worth £12 billion are unlikely to go ahead and the lives of at least 20 producing fields will be shortened by up to five years.

    The updated Activity Survey results corroborate the conclusions of a study by Professor Alex Kemp which indicate that, over the remaining life of the UK province, reserves of 2.25 billion barrels may be lost.

    Oil & Gas UK’s chief executive, Malcolm Webb, said: “Since the Budget, the industry’s top priority is to seek engagement with the Treasury to try to reduce the negative impacts of the tax change on future investment.

    "Our report, which quantifies the investment and production made marginal by the tax increase, reinforces the absolute necessity of agreement on new and extended field allowances, a constructive resolution of decommissioning tax relief restrictions and associated tax uncertainty and the need for a more predictable fiscal regime. In this way, we can begin to re-build investor confidence.”

    As expected, the research shows that companies will continue with most of the projects to which they are contractually and commercially committed.

    However, compared with just three months ago, the economics of a significant and worrying number of projects involving £12 billion of investment and over a billion barrels of oil and gas are now marginal and may not proceed. In the next ten years alone, the investment earmarked for projects considered likely to go ahead has fallen by 30 per cent from £33 billion to £23 billion.

    “If these projects do not go ahead, over time the UK will lose out not only on the creation of around 15,000 jobs across the UK but also on oil and gas production equating to over a year’s domestic supply. To fill that gap, energy imports worth £50 billion will be required, increasing the cost of energy to the UK consumer, damaging the nation’s security of energy supply and widening the trade gap.

    Mr Webb continued: “Whilst we fully appreciate the financial difficulties which the Government now faces, reserves left in the ground will not generate any tax revenues and we estimate that direct tax receipts of £15-20 billion will be foregone if the newly marginalised projects do not proceed.”

    The survey reveals that the tax increase has not only reduced the viability of a number of new projects but also the ability of older fields to attract the investment they need.

    The continued operation of these older fields, which are often located at infrastructure hubs, can be crucial as their removal can result in oil and gas nearby being left undeveloped.
     
    Mr Webb said: “Investors are exposed to oil price volatility equally in all territories. However, successive and unexpected negative changes in our tax regime reduce the attractiveness of the UK and put it at a competitive disadvantage.

    “Constructive discussions must now proceed between the Treasury and the industry. The items to be addressed are new and extended field allowances, the resolution of the decommissioning issues, the construct and operation of the trigger mechanism and last but certainly not least, finding a cure for the chronic fiscal instability of the UK regime.”

     

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