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Sunday Telegraph: BP’s number-cruncher bows out with harsh words for Whitehall

EXTRACT: Ominously, this warning shot comes just as Shell is raising serious questions about its commitment to UK oil and gas. BP’s main rival has just put a swathe of its North Sea drilling kit up for sale, while scrapping plans for a £25m headquarters in Aberdeen, putting hundreds of jobs at risk.

By Liam Halligan, Economics Editor, Sunday Telegraph
Last Updated: 2:13am BST 24/06/2007

Most of us have a vague idea that North Sea oil production has lately been slowing down. But by how much?

I looked up the answer in BP’s annual Statistical Review of World Energy, published earlier this month. Packed full of information about global energy markets, it is a highly authoritative data source in a notoriously murky area.

Well, the UK’s ability to extract the black gold is declining at an alarming rate. This country pumped an average of 1.63m barrels a day during 2006 – 10 per cent less than the year before.

In 2005, our North Sea yield dropped by 11 per cent – and by another 10 per cent again in 2004. In fact, the UK is now enduring the steepest and most sustained production cut of any major oil producer.

I discussed this trend with Peter Davies, BP’s chief economist for the last 17 years and the man responsible for the Statistical Review. He mentioned “rising costs”, and “contractor shortages” but took his main aim squarely at the Treasury.

“This steep decline in North Sea production would be much slower if the tax situation was more attractive,” he said. “We could ultimately extract more oil if the fiscal regime was more benign”.
 
These words will raise political eyebrows. They come at a time of growing tension between the Government and Britain’s biggest energy company.

Last month, BP announced it was abandoning plans for a pioneering “carbon-capture” power station at Peterhead in Scotland – on the same day ministers published their energy White Paper, which further delayed Government support for such projects.

Oil and gas companies pay corporation tax rates of up to 75 per cent once supplementary charges are included. Their contribution to the Chancellor’s coffers rose to £9.8bn in 2006, up from £5.4bn the year before.

The industry is currently in talks with the Treasury about North Sea tax rules, with discussions due to conclude this autumn. With ministers worried about energy security, and oil back above $70 a barrel, BP seems to be picking this moment to raise the political stakes.

“The North Sea is clearly declining,” said Davies, who has been at the company since 1985. “And when fields mature, you need incentives to bring in the more inaccessible and expensive oil. Investment in the North Sea isn’t always attractive, so the challenge is to keep the incentives there”.

Ominously, this warning shot comes just as Shell is raising serious questions about its commitment to UK oil and gas. BP’s main rival has just put a swathe of its North Sea drilling kit up for sale, while scrapping plans for a £25m headquarters in Aberdeen, putting hundreds of jobs at risk.

Beyond tax, Davies and I spoke about the long-term outlook for prices and global crude production. Asked why oil was now so expensive he said “geo-political factors, the OPEC exporters’ cartel and cost structures” were to blame.

“If you took me back to 1990 when I started this job, and showed me today’s oil supply and demand numbers, I would have predicted prices of around $20 a barrel,” he said.

“But oil traders remain very worried indeed about events in Nigeria, Iran, Venezuela and so on,” he said. “Also, when oil fell to $10 [in the late 1990s] that gave OPEC a jolt. It is now an increasingly coherent cartel, with members more willing to cut production on a short-term basis”.

Referring to OPEC agreements earlier this year, Davies said: “They are not explicit about this, but the cartel now moves to defend prices of $55 to $60. That’s just one reason why I think prices will stay high for at least the rest of this decade”.

Having said that, Davies still insists the world has enough proven oil reserves to provide 40 years of consumption at current rates. He dismissed “peak oil” theories that production will soon decline.

“The geo-scientists and others who say this do raise valid concerns”, said Davies. “But to claim the peak is imminent – 2010, say – is not reflected by global capacity growth”.

He argues that “when peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies, or for some other reason, as it is from peak production”.

While stepping down as chief economist this year, Davies will stay on as an advisor to BP. As such, he’ll remain an avid reader of the Statistical Review, but is “pretty relieved” that compiling it is now someone else’s problem.

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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/24/ccliam224.xml

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