Tax plea as North Sea’s oil output slumps

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Norwegian-style tax breaks for exploration and more cooperation by companies to cut costs such as transport would help Britain’s ageing North Sea oil industry to fight decline, industry leaders say.

Oil and gas production, in which a number of Yorkshire businesses have an interest, has plunged by two-thirds since 2000 and particularly steep falls of 14.5 per cent last year and 18 per cent in 2011 have aroused government concern.

With the North Sea in its fifth decade of pumping oil and gas, finds tend to be small and costly to exploit, while old platforms and pipelines need more maintenance, cutting output and profits.

The Government has sought to cushion the blow of a tax increase on producers in 2011 by introducing tax breaks for some new fields that are harder to develop and for revamping older fields. It has also launched a review of the North Sea to maximise the industry’s economic benefits.

The outlook over the next two to three years is rosier. Investment is forecast to reach a record £13.5bn in 2013, as much as £6bn more than two years ago, and production is expected to pick up in 2015.

Beyond that, the picture is less clear.

“At the moment we don’t see this level of investment carrying on post-2016. For spend to be at the level it is now, we do need to see more exploration success,” said Lindsay Wexelstein, an analyst at energy consultancy Wood Mackenzie.

Prolonging the North Sea’s life in the longer term will require a flexible tax regime, said company bosses at a conference in Aberdeen, the centre of Britain’s oil sector.

“Given the maturity of the North Sea, it will be increasingly important to adapt fiscal policy to different activity types,” Andrew Gould, the chairman of BG Group, which has extensive interests in the UK North Sea.

Tax relief on enhanced oil recovery – an expensive technique which involves pumping associated gas back into oil fields to raise the recovery rate – could lift volumes, said the chief executive of industry body Oil & Gas UK, Malcolm Webb.

“There are huge volumes of oil in this,” he said, adding that only about half the oil in any field is now extracted before it is shut down.

Graham Stewart, chief executive of Faroe Petroleum, said a tax-based exploration incentive like one operating in Norway since 2005, would help promote new finds.

“Norway took a gamble and it paid off for them. I believe some similar arrangement could work here,” said Stewart, whose company explores for oil in Britain and Norway. Exploration off Britain has fallen behind that of Norway, with which it shares the North Sea. Big discoveries in Norway include the Johan Sverdrup field – 2011’s biggest find globally.