North Sea production decline to halt

Friday 13 January 2012 07.21
New investment in North Sea could help UK tax revenues
New investment in North Sea could help UK tax revenues

New research shows that British oil and gas tax revenues could rise by billions of pounds this year as high oil prices boost earnings and tempt operators into opening new fields after a decade of sharp declines.

Research by consultancy Wood Mackenzie suggested that the past two years of investment have set the stage for a landmark shift in the North Sea, following exceptionally dismal data in 2011 when oil and gas production in the third quarter slumped at the fastest rate since records began in the mid-1990s.

Oil and gas investment in Britain is set to hit an all-time high this year, adding new jobs and potentially more than £5 billion in tax revenue to Britain's budget.

British oil and gas production has fallen at an annual average of 4.13% and 6.16% respectively since 2005, according to government figures.

A halt in falling output alone would give the Treasury almost £2 billion more in gross production revenues in 2012 than it did in 2010, Reuters research showed. Calculations were based on 2010 oil and gas prices and an industry average tax rate of 68%.

But higher oil and gas prices this year could lift tax revenues by £5.5 billion compared with 2010, the latest year for which data is available, although that is before companies deduct capital and operating costs and some other rebates.

"As of 2012 we expect production declines to halt for liquids (including crude oil) and gas, and we expect that to continue for a few years until the decline starts again," Lindsay Wexelstein, an analyst at energy consultancy Wood Mackenzie, told Reuters.

Wexelstein predicted a slight increase in gas production but said oil output would most probably remain stable.

North Sea oil and gas output passed its peak at the start of the last decade as the larger and easier-to-tap deposits were pumped out. That peak remains out of reach to this day, Wexelstein said.

BP, Total, RWE Dea, BG Group, and GDF Suez have spearheaded a recovery in output after spending billions of pounds developing seven of the biggest discoveries in the UK continental shelf in recent years.

The improved investment outlook appears to challenge oil and gas company officials who said last year's surprise hike in the tax on production would thwart investment and lead to job losses.