Should we ask Norway to run our Treasury?

Opinion by Energy Voice

THE announcement by BP of its intention to invest £4.5billion in the Clair Ridge development West of Shetland has quite rightly attracted a lot of interest, not least from PM David Cameron.

His advisors obviously deemed it important enough for him to pop up to Aberdeen for an hour or so in order to address a group of BP staff whom I have to say looked completely bored.

Of course politicians always try to associate themselves and their parties with success and probably it’s true that almost anywhere apart from Aberdeen, Holyrood and oil company boardrooms around the country Cameron’s praise for the industry would have gone down well.

But in Europe’s Energy Capital, this was about seeking reconciliation with an industry battered by a lunatic tax regime.

Personally I think the guy has the cheek of the devil. After George Osborne’s tax hike neither Cameron nor his government should be given nor deserve any credit whatsoever for BP’s success.

As much as I’m sure Cameron & Co would love to try to use BP’s announcement as a means of convincing the rest of the UK and potential inward investors that all is now well in the oil and gas industry the fact is that Osborne’s tax hike is still causing a great deal of heartache for the many oil juniors trying to hunt for and develop new reserves.

To borrow a phrase from Oil & Gas UK “well in excess of one billion barrels of the UK’s oil and gas resource are ‘fiscally stranded’, which is to say that the current tax system renders them uncommercial”.

I think that figure could well go up considerably over the remaining life of the current government.

BP’s Clair Ridge project is relatively large and the company is anticipating recovering something over 640million barrels. It’s simply the next phase in the development of the massive Clair field found in 1977 and will likely allow production to continue beyond 2050.

Think about it . . . 2050. That’s getting pretty close to 100 years since hydrocarbons were first found in the North Sea.

The problem is, while the Clair story is worth telling and there are certainly a few other projects being developed that were kicked off prior to Osborne’s tax changes, there is a very perceptible change in attitude and commitment particularly from smaller companies.

From Deloitte’s latest report on drilling activity it is now pretty clear that whilst activity has risen some 45% in the third quarter the overall trend remains firmly downward. Although 16 wells were started between July and September this year that’s actually 36% – over a third – less than during the same period in 2010.

Even more depressingly Deloitte says “This brings the total number of wells drilled so far in 2011 to 37, a 41% decrease on the same period last year and the lowest number drilled in this period since 2003” and that’s not what either they or Energy would expect whilst oil prices are still well over $100.

Hannon Westwood, who track UK drilling for Energy from month to month, tell an equally grim story.

Sure, some companies might be having difficulty funding drilling

Deloitte and Hannon Westwood also point out that, in sharp contrast to the UK North Sea situation, in the Norwegian sector there were double the number of wells spudded in Q3 2011 compared to the same period in 2010.

Now I’m pretty sure that companies operating in the Norwegian sector will think no differently about global oil demand, the economy and so on and so forth and yet they are still drilling a lot more wells. So it would seem logical to assume that Osborne’s tax hike remains the biggest factor turning companies off the UKCS and that for Norway their remarkably stable tax regime and their government’s consistent support for their oil and gas industry is paying off.

Like David Cameron we may think BP’s Clair Ridge project is impressive enough for him to pop up from London for a flying visit to Aberdeen.

However, just about 30 miles over the boundary between the Norwegian and UK sectors of the North Sea at about the same latitude as Marathon Oil’s Brae fields cluster, linked oil discoveries made by Swedish company Lundin and Norway’s Statoil have really set industry pulses racing.

It should, but probably won’t, be a wake-up call for the UK.

Lundin operates the Avaldsnes prospect which is part of a discovery that is amongst the five biggest ever made in the Norwegian sector. Aldous Major South and Avaldsnes are part of Norway’s biggest discovery in more than 20 years.

Between them they are now estimated to hold up to 3.3billion barrels of recoverable oil equivalent. That will also see Norway’s industry to 2050 and beyond.

Whilst reading the Lundin and Statoil statements about this and making lots of cheek sucking type noises, it struck me that what Statoil/Lundin’s joint mega-discovery and BP’s Clair Ridge development tells us is that there is actually considerably more potential left in the North Sea than we probably realise.

Whilst most estimates of what’s left to be produced from the North Sea are based on statistics, probability and all that good theoretical number crunching stuff, the real proof can only come from actually drilling holes in the ground.

For all we know there may well be one or more Avaldsnes-size fields on the UKCS still waiting to be found. In fact, I think we could be reasonably confident that this is almost certainly the case.

The problem is though that Osborne’s tax tinkering could well lead to us not finding that field or fields.

The pretence that taxing oil companies more would help motorists was never going to convince anyone with an IQ of more than one, but the damage it may do to our long-term economic future remains incalculable.

It is though very typical of the short-termist thinking we get from the Treasury that continues to do the economy so much damage and makes us less competitive.

The irony is of course that this type of thinking also explains why Norwegian industry is getting to build one of the Clair Ridge jackets and it will almost certainly also get to build whatever they decide on to develop the Aldous-Avaldsnes discoveries as well.

It seems it’s not just managing their tax regime the Norwegians are better at. Perhaps we should subcontract running our economy to them.