UK tax breaks push offshore oil, gas investment to 30-year high of $20 bil

London (Platts)--25Feb2013/526 am EST/1026 GMT


Following the introduction of tax changes to encourage UK offshore oil and gas production, the industry has responded with the highest investment in more than 30 years, the offshore operators group Oil & Gas UK said in its 2013 Activity Survey published Monday.

But it warned that exploratory drilling was low and reserves were not being replaced as a result.

Its 2013 Activity Survey reveals a "diverse mix of investment, ranging from projects of less than GBP50 million through to some of over GBP1 billion, in total soaring to GBP11.4 billion in 2012. This is now expected to rise even further to at least GBP13 billion in 2013."

Companies are now looking at investments totaling almost GBP100 billion. "After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf is now benefiting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades," OGUK CEO Malcolm Webb said.

"The recent introduction of targeted tax allowances to promote the development of a range of difficult projects, coupled with the government's ground-breaking commitment to provide certainty on decommissioning tax relief, has prompted global companies and independent businesses alike to take another look at the UK as an investment destination and resulted in a new wave of investment. It is crucial that we sustain this momentum in the years ahead."

The 33 projects that the Department of Energy and Climate Change has approved since January 2012 involve investment of GBP13.4 billion. "However, herein lies the next challenge. As reserves moved through into production they have not been fully replaced with new discoveries. While sanctioned reserves rose at the start of 2013 to 7.4 billion boe, the highest level for six years, the total reserves on companies' plans fell by half a billion boe," Webb said.

"Only 21 exploration wells per year on average were drilled over the last three years," he added. "As a result, in 2012 not enough barrels were discovered to replace all those produced. However, again, there is real cause for encouragement as the survey results lead us to forecast 130 exploration wells over the next three years which, alongside the use of new and improved subsurface technology, should result in many more barrels being discovered."

OGUK pointed out that production fell 14% year on year in 2012 to 1.55 million boe/d in 2012 owing to unfriendly tax hikes in the middle of the last decade. It forecast a significant upturn over the next three to four years, however, seeing a rise to 2 million boe/d by 2017 with significant benefits for the UK economy.

The projects approved in 2011 and 2012 will over time produce more than 2 billion barrels of oil and gas, generate GBP100 billion value for the economy and an additional GBP25 billion in production taxes for the finance ministry, OGUK said.

--William Powell, william_powell@platts.com
--Edited by E Shailaja Nair, shailaja_nair@platts.com

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