North Sea industry blames windfall tax for sharp declines in oil and gas production
The UK’s oil and gas sector is set for a steep decline in production and capital expenditure, alongside a sharp uptick in decommissioning costs, according to the latest data from the North Sea industry’s watchdog.
The North Sea Transition Authority (NSTA) has calculated that annual crude oil production will more than halve over the current decade, dropping from 49.34m tonnes in 2019 to 24.62m tonnes in 2028, including a six per cent decline this year.
It forecasts that gas production will drop from 37.51m tonnes to 20.49m tonnes over the same period, with a further five per cent decline this year.
This will come alongside a sharp drop in predicted capital expenditure, which NSTA expects to fall from £5.42bn to £2.5bn over the ten-year window, with decomissioning costs rising from £1.39bn to £2.0bn.
These numbers are not only stark, but a sharp revision to recent figures, with the NSTA predicting five megatonnes more of oil and gas over the same period just six months ago.
Mark Lappin, member of Brindex, the UK association for independent North Sea operators, blamed the instability of the UK’s investment regime for the further downgrades in production.
He argued this left the country at the mercy of overseas imports to meet its supply needs.
The Climate Change Committee, Westminster’s independent advisory group, predicts half of the UK’s energy requirements between now and 2050 will still be met by oil and gas, and as much as 64 per cent of UK energy needs between 2022 and 2037.
“The industry and government and policy makers ought to be working together to bridge the gap between demand and production, because otherwise we become more dependent on imports. Domestic supply is better for jobs, better for Treasury receipts, better for energy security, and better for emissions than shipping stuff around the globe,” Lappin said.
The falling rates of production follow Chancellor Jeremy Hunt hiking the windfall tax from 25 to 35 per cent last November, and extending its duration to 2028 without any prospect of any early closure.
Lappin argued these stringent taxes, combined with the frequent fiddling with the investment regime, was putting off North Sea oil and gas companies despite the generous investment relief.
He said: “A lot of our industry is about long-term planning for exploration and production. If you can’t plan for your investment over the long term, because a jurisdiction changes things along the way – that’s something that you’d factor into your investment.
“We need a state of stability and we need to be able to plan for our projects and if the tax levels are particularly high, that will clearly affect investment.”
Commenting on the data, rival industry body Offshore Energies UK also raised concerns about the effects of the toughened levy.
“The introduction of two windfall taxes in one year only undermines this further, significantly eroding investor confidence and the capital available to invest in the decade ahead. These factors undermine both UK energy security and the offshore energy sector’s ability to accelerate the transition to a low carbon economy,” he said.
The government has been approached for comment.