North Sea Protection: U.K. Oil Industry Seeks Aid

THE WALL STREET JOURNAL

APRIL 17, 2009, 3:18 A.M. ET

By GUY CHAZAN and JAMES HERRON

LONDON — The U.K. oil industry is pressing for big tax breaks in next week’s government budget, warning that dozens of small oil companies operating in the North Sea will go bust without help, which in turn could accelerate a decline in U.K. oil and gas production.

The warnings come as smaller players in the industry reel from low crude prices, high costs and shrinking credit. Many are cutting investment and drilling fewer wells.

But with the U.K. facing a grim economic outlook and a growing budget deficit, it’s unlikely the government will go further than a minor tax change announced in November.

Malcolm Webb, head of Oil & Gas U.K., a trade association, said exploration on the U.K. Continental Shelf “could effectively collapse” unless the government introduces “targeted incentives” for the industry.

Getty Images

Golf shares space with shipping in Aberdeen, Britain’s busiest harbor, from which goods are transported to North Sea oil platforms.

Oil companies want Britain to follow the lead of Norway, whose tax system encourages oil exploration. Although its overall tax rate is higher, oil companies get tax breaks on exploration costs.

In a letter to Treasury chief Alistair Darling, Mr. Webb said capital investment could otherwise be halved to £2.5 billion ($3.75 billion) in 2010. Mr. Darling unveiled a “value allowance” that would reduce the tax rate for small, technically challenging fields in his November pre-budget report. But Oil & Gas U.K. says it should be broadened to all new developments.

“We’re saying cut us some slack, without having to put your hand in your pocket,” Mr. Webb said. All “decisions on the budget will be announced [April 22],” a Treasury spokesman said.

For decades, the North Sea has been one of the world’s great sources of oil and gas, providing a critical complement to the Middle East. Some 39 billion barrels of oil equivalent have been produced from North Sea fields since the early 1970s. An estimated 25 billion barrels remain to be recovered.

But the basin is maturing rapidly, and output has been declining since 1999. New discoveries are miniscule compared to the big finds of its heyday and are harder to develop. Some of the world’s biggest oil companies, such as BP PLC and Royal Dutch Shell, have reduced their exposure to the North Sea and have shifted their focus to places like Canada and offshore Angola.

The U.K. government has opted to lure smaller players with low-cost licenses. But many of these independents have seen their access to debt and equity dry up. At the same time, the price of oil, down around $100 a barrel from the record set of last summer, has made some projects uneconomical.

Of the 176 companies that hold U.K. petroleum licences, 105 are neither producing oil or gas nor have fields under development, according to energy consultancy Hannon Westwood. Without cash flow to finance operations, “they will disappear,” said Chris Bulley, a partner at Hannon Westwood.

Already, the number of exploration wells drilled in the first three months of this year fell 78%, compared with the same period a year earlier, according to accountancy firm Deloitte. A big factor was financial turmoil at Canada’s Oilexco Inc., which had been one of the most active explorers in the North Sea. Oilexco’s North Sea unit was placed under administration in January. The unit was bought by Premier Oil PLC last month.

Write to Guy Chazan at [email protected] and James Herron at[email protected]