September 6, 2013 / 1:36 PM / 5 years ago

Britain's ageing North Sea oilfields need flexible tax, collaboration

* Oil and gas output has plunged by two thirds since 2000

* Norway has had tax-based exploration incentive since 2005

* Review led by Ian Wood has scope to promote collaboration

By Sarah Young

ABERDEEN, Scotland, Sept 6 (Reuters) - Norwegian-style tax breaks for exploration and more cooperation by companies to cut costs such as transport would help Britain’s ageing North Sea oil industry to fight decline, industry leaders say.

Oil and gas production has plunged by two thirds since 2000 and particularly steep falls of 14.5 percent last year and 18 percent in 2011 have aroused government concern.

With the North Sea in its fifth decade of pumping oil and gas, finds tend to be small and costly to exploit, while old platforms and pipelines need more maintenance, cutting output and profits.

The government has sought to cushion the blow of a shock tax hike on producers in 2011, introducing tax breaks for some new fields that are harder to develop and for revamping older fields. It has also launched a review of the North Sea to maximise the industry’s economic benefits.

The outlook over the next two to three years is rosier. Investment is forecast to reach a record 13.5 billion pounds ($21 billion) in 2013, as much as 6 billion pounds more than two years ago, and production is expected to pick up in 2015.

Beyond that, the picture is less clear.

“At the moment we don’t see this level of investment carrying on post-2016. For spend to be at the level it is now, we do need to see more exploration success,” said Lindsay Wexelstein, an analyst at energy consultancy Wood Mackenzie.

Prolonging the North Sea’s life in the longer term will require a flexible tax regime, said company bosses at a conference in Aberdeen, the centre of Britain’s oil sector.

“Given the maturity of the North Sea, it will be increasingly important to adapt fiscal policy to different activity types,” Andrew Gould, the chairman of BG Group, which has extensive interests in the UK North Sea.

Tax relief on enhanced oil recovery - an expensive technique which involves pumping associated gas back into oil fields to raise the recovery rate - could lift volumes, said the chief executive of industry body Oil & Gas UK, Malcolm Webb.

“There are huge volumes of oil in this,” he said, adding that only about half the oil in any field is now extracted before it is shut down.

Graham Stewart, chief executive of Faroe Petroleum, said a tax-based exploration incentive like one operating in Norway since 2005, would help promote new finds.

“Norway took a gamble and it paid off for them. I believe some similar arrangement could work here,” said Stewart, whose company explores for oil in Britain and Norway.

Exploration off Britain has fallen behind that of Norway, with which it shares the North Sea. Big discoveries in Norway include the Johan Sverdrup field - 2011’s biggest find globally.

The number of exploration wells drilled off Britain has been in decline since a 2008 peak of over 40 and was 24 in 2012, more than the 14 drilled in 2011. Off Norway more than 40 have been drilled each year since 2008.

Oil & Gas UK estimates that between 3 billion and 9 billion barrels of oil equivalent have yet to be found off Britain - which produces 0.2 percent of the world’s oil and 1.2 percent of its gas, but small operators want more help over tax.

Around 90 percent of Britain’s oil and gas is in Scottish territory and prospects for North Sea output are vitally important to the Scottish National Party which is seeking independence in a referendum next September.


The government-commissioned review of the North Sea, the first in more than 20 years, will not make recommendations on tax but Webb said it could be influential in other respects.

Encouraging more collaboration between companies is one area where the review, led by Ian Wood, former chairman of FTSE 100 oil services group Wood Group and due to be published early next year, could help the industry.

“We all - industry, suppliers, government, communities and NGOs alike - need to get better at working together,” said Sam Laidlaw, chief executive of utility Centrica, which produces oil from more than 20 fields off Britain’s coast.

More collaboration between companies could help ensure any new oil fields found can be linked to existing infrastructure.

Currently smaller oil companies, who increasingly make up the North Sea’s population as majors such as BP and Royal Dutch Shell hunt bigger opportunities elsewhere, can struggle to gain access to pipelines.

There are fears that if infrastructure is taken down before new discoveries are made, new smaller fields that are found later could be uneconomic without it.

“If the North Sea is to remain a competitive investment prospect it must achieve a step change in the cost of exploitation,” Gould said.

The investment climate has grown increasingly competitive over the past decade as new finds and technologies have opened up dozens of big new oil and gas areas elsewhere in the world.

Harnessing new technologies will help cut costs, Gould said, adding he expects there will be fewer staff based offshore in future, while more equipment will be controlled remotely.

Marcus Richards, chief executive of Aberdeen-based Dana Petroleum, a unit of Korea’s National Oil Company, said North Sea companies needed to start working together to bring down their supply chain costs, as they do in the Gulf of Mexico.

“An example would be a company which runs logistics across the North Sea and has multiple service partners. What you do, is a bus run instead of a bespoke trip from shore to the offshore facilities,” he said.

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