The USí Department of Energy has launched a scathing condemnation of the UK governmentís tax hike on North Sea oil and gas revenues, warning that excessive costs loom menacingly over Britainís energy industry.
Washingtonís claims follow on from the UK energy sectorís internal fears, voiced in March, that extra tax costs forced upon contractors would be flippantly passed on to exploration and production companies, which would in turn kill off peripheral projects wallowing in escalating costs.
Citing the petroleum revenue taxí sizeable increases to 81% of profits for old fields, and 62% for fresher schemes introduced in 2011, Washington have expressed their utter dissatisfaction with UK governmentís recent tax legislature. Combined with a cap on relief for ageing, less productive old fields and several other penalties, the US Energy Department said that recent measures taken by UK government have stunted North Sea exploration and strangled a string of major ventures.
ìAs a result of the significant increases in taxes, the UK Continental Shelf [UKCS] projects have become even less competitive,î said a report by the departmentís research arm, the Energy Information Administration (EIA).
ìIncreases in operating costs coupled with higher taxes have resulted in decreased investment in both brownfields and new exploration. Even without the increased taxes, operating costs in the UKCS were prohibitively high, exacerbated by the high decommissioning costs of old facilities,î it added.
The EIA continued to disparage the “significant increases in taxes”, implying they led to the closure of several start-up projects most notably the Statoilís Mariner. In doing so, the UK caused Centrica, the British utility company, to launch a comprehensive assessment of all its exploration exploits to see which projects had to be eradicated entirely.
In its findings, Centrica appeared to concur with the USí damning verdict, displaying Britainís thorough decline in energy productivity on the front of its webpage. Through various graphs, the utility company painted a gloomy picture on Britainís energy decline, showing it became a net importer of refined petroleum products in 2013 for the first time in 30 years.
Meeting criticism on many fronts, Malcolm Webb, head of Oil & Gas UK delivered his judgement:
ìExploration wells fell by half in 2011 and that is not a coincidence. UK offshore is a very high-cost province and they need to lighten the tax burden.î
The tax rises were initially implemented to catalyse a cut in fuel duties for consumers, an outcome which always proves popular with the public. However, when making the call, George Osborne, the Chancellor of the Exchequer, ignored foreboding counsel that it would diminish investment and in doing so, pierce the heart of oil revenues. This particularly pertinent as the sector accounts for a fifth of UK corporate tax revenue.
The higher taxes have proved the chancellor incorrect thus far, as revenues continue to plummet and show no signs of improving. Conversely, in accordance with the ìLaffer Curveî effect, tax revenues are set to continue falling in absolute terms if the confiscation rate is impacted too heavily.
This fall in revenue is mirrored in data recently issued by the UK treasury which showed that tax raked in from oil & gas had fallen from £8.8bn in 2010-11 to £4.7bn in 2013-2014 ñ the lowest share of GDP in recent memory. This enormous shortfall occurred despite Brent crude oil prices having stood at in excess of $100 a barrel, inspired by supply problems in Iraq and regions of Africa.
The fall in revenues does not bode well for Alex Salmon, SNP leader, who earlier this year spoke of radical spending plans, with North Sea revenue, if Scottish independence is achieved following Septemberís referendum.
Despite including various relief measures and conciliatory reforms in his last budget, Osborne did not budge on the 81% profit tax on North Sea revenues. There are mixed views on whether the relief goes far enough, with Chevron, most notably, showing apathy towards its $10bn Rosebank project due to rising drilling costs.
A report speculating on the North Seaís prospects by renowned former Wood group chairman, Sir Ian Wood, said investment will go cold over the remainder of this decade, potentially decreasing by 50%. Wood goes on to call for a comprehensive revamp of the tax regime:
ìThere is a clear consensus that exploration is at a critically low level and badly needs significant new initiativesî
The growing dependence on foreign energy is severely debilitating to the UKís trading balance, which is the lowest out of any major country across the globe. The current account deficit stands at a staggeringly high 5.4% of GDP in the fourth quarter, a figure higher than the majority of the ìfragile fiveî emerging market economies that are deemed especially susceptible to market fluctuations.
ìThis is flashing amber,î said David Bloom, currency chief at HSBC. ìBritainís recovery is unbalanced, with a consumption-driven deficit and very little pick-up in investment. It canít carry on being the worldís consumer of last resort.î
The economic blackout being suffered by Britainís energy sector is in stark contrast to the US equivalent departmentís fortunes. Recently overtaking Russia to assert itself as the worldís leading producer of natural gas, the US looks set to bypass Saudi Arabia, with all its natural resources, to become the biggest producer of petroleum and liquid gas as well. All the while its trade deficit is diminishing, the UK is suffering.
When will government take action to re-energise the wilting industry?