Well, here we all are . . . another year dawns over the chill, grey wastes of the ever restless North Sea.
Always a daunting place to work, I can imagine that a lot of workers have started their first 2016 shifts, wondering if they’ll still be in a job six months from now, let alone a year hence.
Believe some of the analysts . . . like the bunch at Moody’s .. . then we’re headed towards $20. If that comes true then the UK Continental Shelf will be finished as a significant producer of oil & gas.
At best, it looks as if 2016 will pan out pretty much like 2015 . . . desperate . . . though some fields will still be able to make money. I think you can all forget anything resembling a significant uplift in 2017.
For those of you who have been in the offshore industry for a couple or more decades, you should perhaps reflect on how long it really took the North Sea to recover from the 1986 oil price crash and the more insidious late 1997 through early 1999 crunch.
Reality is that the UKCS took a lot longer than most people realise to get its mojo back after the ’86 shock, even though it was a young energy province on the ascendancy.
That is why, six/seven years later, the Cost Reduction Initiative for the New Era (CRINE) was launched. It was a kick-start to a brief period of prosperity before the oil price went to ratchet again.
Again, think back. How long did it take the UKCS to really pick itself back up again after that event, notwithstanding the various CRINE era new field developments providing some relief throughout the second shock?
Five years anyway. And that is in spite of production being a peak. It’s there, writ large in The Press & Journal headlines and archive..
A relentless uncertainty pervaded despite the setting of pan-industry targets by the successor to CRINE, namely the Oil & Gas Industry Task Force. Why? Because no one thought the oil price boom was going to last.
It didn’t help that the government of the day . . . New Labour . . . kicked the oil companies twice in the nuts with two tax hikes, not long after it had appeared to be generous by changing the tax regime to one largely based on Corporation Tax at 30% (like the rest of British industry at that time in other words).
In April 2002, the then chancellor, Gordon Brown, slapped on an additional 10% layer of Selective Corporation Tax.
The average Brent spot price for April 2002 was $25.73. Adjusted for inflation using the Band of England rule of thumb calculator, that equates to about $37.50 today . . . a bit more perhaps.
Oil & Gas UK’s predecessor, UKOOA protested, claiming that the increase would cost the UK’s offshore industry £7.6billion in lost revenues and threaten between 30,000 and 50,000 British jobs over the ensuing eight years or so.
Moreover, it would deter new spending from existing operators and discourage first-time investment and so hasten the decline of the North Sea which, by then was starting to happen.
Brown wasn’t finished.
On December 5, 2005, he caught the industry on the back foot by doubling the SCT surcharge on UK North Sea profits to 20% against a backdrop of plummeting domestic oil and gas output.
Moreover, Brown moved swiftly, implementing the surcharge in January 2006 with the expectation that it would rake an additional £2.3billion into Treasury coffers that year and possibly more if oil prices held above $60 per barrel.
As I recall in my new book ABZ & Big Oil: “The shock move drew immediate protest from UKOOA, and Shell announced 10 days later that it was scaling back North Sea drilling for 2006 by reducing its requirement from three to two rigs.
“Others such as BP said they would of course review their portfolios in the light of the overall Corporation Tax burden jumping from 40% to 50%, of which 29% was surcharge.”
UKOOA had been confident that the Treasury would leave well alone and be content with having already siphoned twice as much tax off the industry that fiscal year alone, thanks to the terrific, sustained high oil price run.
In December 2005, the average spot price for Brent was $56.86. Apply the BoE calculator and that equates to around $73.50 today.
And so to the now; Brent is in the basement . . . knocking around $35.
So why the hell hasn’t the Treasury abolished SCT yet? Followers of this column know that I’ve asked this question before; and when I did that the price of Brent was nowhere near as terrible as it now.
Nor had I applied the BoE inflation tool to the prices prevailing in April 2002 and December 2005.
As things stand today and based on the above roughs, Brent is riding below both of Brown’s notional SCT thresholds.
I realise that I am being simplistic, but there is a basic point here. In my view, the Treasury is being downright dishonest by not abolishing SCT totally. The small reductions of the past year and a bit are an insult.
Treasury must now align the taxation of oil & gas companies extracting and trading North Sea barrels with other industries in Britain and to do so without further undue delay.
There is no fat left, the companies are eating into their muscle. They must be allowed to keep more of whatever profit they make simply to stem the eating away of that muscle, and/or set off against allowances!
Forget the principle of “fair economic rent” for The State as a factor to consider when taxing UKCS players henceforth; that is now ancient history. This is a fight for survival.
And forget the fact that the industry got itself into a mess and appears to be horse-trading production efficiency improvements for fiscal concessions.
Chancellor Osborne must wake up before it’s too late. The UKCS is living on borrowed time.