End to oil threatens recovery
OIL rigs dot the horizon, while above an orange ball of fire gushes from the flame tower, reddening the cheeks of people standing on the helideck. Flaring up for Britain’s economy is the prospect of an end to North Sea oil and gas, with no clear replacement. Weak oil prices, rising costs and narrow fiscal leeway to offer oil majors tax incentives are encouraging some to quit just as Britain struggles to recover from meltdown.
“As oil revenues were going down, City revenues were going to take their place. But then all of a sudden City revenues have disappeared,” said John Curtice, politics professor at Strathclyde University.
“It’s part of the backdrop to the financial crisis – we have to find other sources of revenue.”
North Sea oil and gas revenues first came when Britain’s economy was in such straits the government turned to the International Monetary Fund for a loan in 1976 – they funded the country’s economic restructuring under Margaret Thatcher. By most predictions at the time, the North Sea should have stopped pumping a decade ago. It still pays more to government coffers than any industry, including financial services.
Now oil executives say failure to provide incentives could mean the industry winds down in a decade or so, rather than deliver the 30 years of significant production its 25 billion barrels of remaining recoverable reserves are capable of.
But with Britain’s budget deficit expected to top 12 percent of GDP this year alone, there is little wiggleroom. Strathclyde University’s Curtice said there was little policy difference on the North Sea between the ruling Labour Party and the main opposition Conservatives, tipped to win an election due by next June.
“The Conservatives are not offering to cut the rate of taxation on the North Sea,” he said. “Nobody could afford to.”
Already down 44 percent from its 1999 peak, North Sea output could be further hampered by measures to cut carbon dioxide emissions in a new climate treaty in Copenhagen in December. The added costs could prompt firms to leave a billion barrels of resources in the ground that would otherwise be extracted, says industry lobby Oil and Gas UK.
Shearwater sits in 90m of water on four steel legs, with a smaller adjacent platform housing the wellheads. Its main topside is nine storeys tall, can accommodate 93 workers and weighs as much as two large naval destroyers.
The unit cost £850 million (R10.5 billion) to build and came onstream in 2000. It would cost twice that figure to build now, a measure of industry inflation. The industry’s operating costs have also risen. Billions have been spent to improve safety, and labour has gone up. Starting salaries for a new technician range up to £46 000 – twice the average UK wage.
Rising costs are not unique to the North Sea, but in other regions they are offset by the potential for big discoveries. Oil men say high taxation is another reason North Sea investment has fallen to £4.8 billion in 2008 from £6bn in 2006 – older fields are taxed at up to 75 percent while most others pay 50 percent.
A parliamentary committee in June called for tax breaks in a report that said prospects for investment were “bleak” and 50 000 jobs were at risk. The government rejected the call. Some oil majors are already selling North Sea assets to European utilities and firms backed by sovereign wealth funds. The new investors are responsible for about 10 percent of North Sea oil and gas – almost double their output 18 months ago – with investments growing quickly.
The surge in oil prices in the past decade to a peak of nearly $150/bbl in July 2008, before falling to around $80/bbl now, has helped keep the North Sea alive. It pumps 2.5 million barrels of oil equivalent of oil and gas per day. Another agenda item for the Copenhagen talks that politicians have touted as potentially supporting the North Sea is a plan to create incentives to encourage carbon dioxide capture and storage (CCS).
Field owners would receive a fee for pumping carbon dioxide into their reservoirs and the gas could even prolong field life by flushing out more hydrocarbons.
Analysts caution that CCS technology is unproven and incentives agreed in Copenhagen may not be sufficient to cover the costs.
“We are determined to go as far and as fast as we possibly can with CCS,” British Energy Secretary Ed Miliband said last week. – Reuters