History crackles in oil and gas industry praise for a UK budget that does well by doing little. In a press statement, Oil & Gas UK Chief Executive Deirdre Michie welcomed Chancellor Phillip Hammond’s “commitment to fiscal stability.”
That means the government plans not to change anything important to oil and gas producers. With fiscal stability for producers, Whitehall has had its lapses.
The UK fiscal regime for offshore oil and gas production has been complicated. Its structure and taxation rates, for example, have applied differently to fields of different age. Supplemental taxes, allowances, and “ring fences” have come and gone over the years. And the government has, in the past, changed the system without warning when it needed money or thought producers were making too much.
Complexity and painful surprises sour the investment allure of inherently risky work subject to unexpected swings in commodity prices. The combination is especially troublesome for a mature producing region with harsh conditions and high costs.
Fiscal instability drove away many of the major oil companies that once dominated the UK Continental Shelf and aggravated an activity slump under way even before crude prices plunged in mid-2014.
To its credit, the government responded swiftly, launching a program late in 2014 to ease its claim to oil and gas wealth and to streamline regulations.
Without doubt, the improvement has augmented the benefits of oil-price recovery and contributed to what Michie calls “a tentative recovery” on the UKCS.
Her group recently pointed out that offshore producers have announced 11 projects this year, more than all projects of the previous 3 years, and said more are expected.
The government, though, has problems beyond the struggles of a recovering offshore business, largely related to withdrawal from the European Union.
With Brexit, the UK has subjected itself to difficult negotiations, political unrest, and economic uncertainty.
The turmoil gives the oil and gas industry a reason to worry about the future beyond the reason cemented into place by the past.
(From the subscription area of www.ogj.com, posted Oct. 31, 2018. To comment, visit the Commentary channel at www.ogj.com/oilandgascommunity.)