Oil industry warns of declining North Sea production

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Oil production in the North Sea experienced a stark decline in 2011, according to industry body Oil & Gas UK (OGUK).

OGUK estimated an 18% fall in North Sea production in 2011 compared with an average 6% decrease over the last five years. Meanwhile, exploration drilling is down 50% versus 2010, a level not seen since the mid-1960s.

Factors contributing to this decline include the effects of the credit crunch and prolonged field shutdowns following the 2010 Macondo disaster.

In addition, the fall has also raised questions over whether the much-publicised tax hike levied on the industry in the 2011 Budget has backfired on the UK Treasury.

In the 2011 Budget, Chancellor George Osborne increased the supplementary corporation tax (SCT) from 20% to 32%, increasing the effective tax rate for exploration and production (E&P) companies to between 62% and 81%. Osborne's intention was to raise £10 billion to pay for a small decrease in road fuel duties.

However, with production down 18% over 2010, the Treasury has been forced to reduce its 2011 forecast tax take from £13.4 billion to £11.1 billion, despite anticipating a £2 billion windfall from its 2011 tax hike. In fact, Andrew Sentence, PwC economist and ex-member of the Bank of England's Monetary Policy Committee, calculates that the double-digit collapse in oil and gas output in the year to January knocked off 0.5% off annual GDP growth.

Budget wish-list?

"With the impending 2012 Budget just around the corner, the industry will no doubt be hoping for fiscal changes to help reinvigorate investment," said Edison Investment Research. "In the 2012 Budget George Osborne will be faced with the balancing act of reinvigorating investment in the North Sea without losing political points through being seen to be 'favourable' to the oil industry," it added.

The drop-off in activity is, unsurprisingly, prompting the industry to lobby for assistance to boost investment. A new brownfield allowance, an extension of the West of Shetlands allowance to all new developments, and an extension to the High Pressure/High Temperature (HPHT) allowance are all on the 'wish list'.

Edison Investment Research stated that the Treasury could also look to Norway, which allows exploration companies to claim back 78% of exploration capital expenditure from the government in an attempt to encourage higher levels of exploration drilling.

Companies with operations in the North Sea include: Xcite Energy (XEL), which currently owns a 100% working interest in the Bentley heavy oil field on Block 9/3b; Enquest (ENQ), which has said it will deliver an annual growth rate of over 20% per year between 2009 and 2014; Wood Group (WG.), Premier Oil (PMO) and Parkmead Group (PMG).

What's in George Osborne's briefcase for the new financial year? Interactive Investor brings you coverage of the run-up to, and fall-out from, the government's 2012 Budget.