Confidence in UK North Sea up after tax breaks-Deloitte

LONDON Thu Jan 17, 2013 7:01pm EST

LONDON Jan 18 (Reuters) - Investor confidence in Britain's North Sea is on the mend with a jump in drilling and deals recorded in 2012 as the oil province, which is in long-term decline, reaps the benefits of recently announced tax breaks, says a study.

Drilling for oil and gas in waters off Britain was 33 percent higher last year than in 2011 while deal activity surged by around a third in the period, found a study by Deloitte published on Friday.

"After several years of caution and uncertainty, we have a more positive environment, where a number of factors such as tax incentives, high oil price and appetite to invest have combined to make 2012 the most encouraging year for a long time," Graham Sadler, managing director of Deloitte Petroleum Services Group, said.

The British part of the North Sea was rocked by a tax hike in March 2011 which prompted dire forecasts about the future of production. Those warnings appeared to be borne out by a dramatic 19 percent slump in oil and gas output in 2011.

New tax breaks, for older oil fields, heavy oil fields, deep-water fields and others have since given the industry more certainty and are helping provide a shot in the arm for the region, where production has been in decline since 1999.

Deloitte's study found that interest in field development, key to ensure discoveries progress to the production stage, was at a 10-year high with the government granting 21 field development approvals, boding well for a return to output growth.

A study published in December forecast that British oil output would rise in the next few years and in the past three months, the $7 billion Statoil Mariner project and two other substantial projects, Dana's $1.6 billion investment in the Western Isles, and Talisman's $2.55 billion Montrose redevelopment, have all been given the go-ahead.

In contrast to the British part of the North Sea, drilling in the Norwegian North Sea dropped 19 percent in 2012 compared to the year before.

Deloitte's Georgina Kladis, a senior manager in its petroleum services group, said little should be read into the Norwegian decline, attributing it to the limited market for the sort of rigs required to drill in the deeper water around the country.

Norwegian waters remain attractive to oil companies, she said, pointing to appetite for a recent licencing round and a string of big discoveries in the last two years, including the giant Johan Sverdrup field - 2011's biggest find globally.

In terms of the pick-up in the number of deals in the UK North Sea, Deloitte said it was striking that those deals were split almost equally between acquisitions and partnership deals, with the former showing a pick-up since the financial crisis.

"The fact that companies are buying more fields outright is another indicator of rising investor confidence," Deloitte said.

Deals in the UK North Sea in 2012 included China's Sinopec buying a 49 percent stake in Talisman's North Sea operations for $1.5 billion; Kuwait's state oil firm returning to the North Sea after a $500 million deal with EnQuest and Japanese trading company Mitsui entering the North Sea for the first time.

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