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Lloyds List: UK must find GBP300bn to tap North Sea’s fuel resources

Government fiscal incentives are vital, writes Martyn Wingrove in Aberdeen, Lloyds List
Published: Nov 08, 2006

BRITAIN’s oil industry will need to invest up to GBP300bn ($572bn) to extract the remainder of the North Sea’s oil and gas resources, said a leading industry association yesterday.

But while the prospect is currently economically viable given the high oil price, in order to attract more oil company expenditure the UK government will have to improve the fiscal regime and provide more incentives in the long term, industry sources say.

With oil prices close to $60 per barrel, there are at present plenty of incentives for the oil companies to continue investing, but there will be challenges if prices fall further.

There are concerns that higher taxes in the UK, raised by 10% this year, will deter some of the investment needed to extract up to 27bn barrels oil equivalent.

‘It will take another GBP300bn or so to produce our remaining reserves,’ Malcolm Webb, chief executive of the UK Offshore Operators Association, told an industry conference in Aberdeen yesterday.

‘To attract the funds we will have to demonstrate that industry here can make and sustain a competitive margin.

‘We could still be producing 60% of the UK’s needs for oil and 25% of its gas in 2020 and continue to produce both in significant volumes for decades to come.’

He thinks costs per barrel for extracting the North Sea’s remaining resources will be far higher than in the last 30 years, meaning between GBP270bn and GBP300bn investment will be required.

‘It took GBP350bn to produce the first 35bn boe. Now we can get out some 27bn boe at a cost of GBP10 per barrel,’ Mr Webb told Lloyd’s List.

UKOOA’s economics and commercial director Mike Tholen said the range of remaining reserves yet to be extracted was between 16bn and 27bn and it could take a further 20 to 30 years of offshore operations to achieve this. ‘To produce all this will require GBP100bn to GBP150bn of capital investment and will cost GBP75bn to GBP150bn to operate,’ he told the conference.

He also thinks offshore operations could return GBP100bn to GBP150bn in taxation to government over the next 20-30 years, but this depends on keeping the UK a competitive place to invest.

‘Underlying the apparent good health of the oil industry, there lurk some serious threats to our future,’ said Mr Webb. He highlighted the high cost of operations, the short supply of physical resources, people and equipment, and the small size of new discoveries.

‘New reserves now tend to be in much smaller accumulations, often with much higher technical and operational difficulty,’ said Mr Webb.

Shell’s executive vice-president in Europe, Tom Botts, is concerned the UK is losing its competitive edge with other global projects and this was not helped by this year’s tax rise.

‘The tax rate increase removed some GBP6bn from the industry over the next three years. For Shell and other companies in the UK it equates to a material reduction in post tax cash flow,’ he told conference delegates.

‘This is a substantial burden on future investment and has the effect of eroding the confidence in the UK.’

UKOOA and its 41 members, which contribute at least a fifth of all of Britain’s business taxes, want the government to improve fiscal terms.

‘The Treasury seems reluctant to engage in any commitment beyond the existing Parliament. The regulatory regime set for the first half of the North Sea increasingly displays inappropriateness for the second half,’ Mr Webb added.

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