WHY U.K. ENERGY POLICY WORKS

A free market energy policy can work. The trick is to set proper goals.

The U.K.'s free market policy is working very well. Drilling in the British North Sea has recovered from the crash of 1986. Well completions, according to a U.K. Department of Energy survey, might set a record this year. A survey by County NatWest Woodmac of Edinburgh, Scotland, indicates activity will remain strong through at least 1993.

For the U.K., this means a long future as a significant oil producer. Last May, then-U.K. Sec. of State for Energy Cecil Parkinson happily told the House of Commons, "Reserves are going to last much longer than anyone had originally dreamed." The United Kingdom Offshore Operators Association (Ukooa) predicts the mature U.K. offshore will still be producing as much as 1.8 million b/d of oil and 5 bcfd of gas through 2000. Investments, therefore, will remain strong in an economic sector that still accounted for nearly 7% of the British gross national product in 1988.

MATURE BUT ACTIVE

In view of the U.K. North Sea's maturity as an exploratory theater, the drilling rebound is especially remarkable. Remaining known prospects are small by comparison with the old oil giants-Forties, Brent, Piper, Ninian, and partly Norwegian Statfjord. Yet drilling approaches levels of the peak years of the early and mid-1980s. Why?

The short answer is that the U.K. government shrugged off the temptations that have derailed so many energy policies around the world.

First, it accepted a simple but sometimes troublesome geologic reality: Declining production from old giants must be replaced by new production from a growing number of smaller discoveries. Then the government recognized the economic reality that petroleum economics turned inside-out in the half decade after 1981. The U.K. offshore business contracted; its tax payments shrunk. Some governments would have reacted to the revenue decline by raising tax rates. But the U.K. was taxing production at an effective rate of as much as 70%. It eventually acknowledged that it couldn't sustain-let alone raise-those rates in a struggling business without destroying the tax base.

So it adjusted to the new conditions. It lightened the tax burden on petroleum production and withdrew from its once dominant role in oil and gas trading. To improve economics of increasingly common marginal discoveries, it improved "ring fence" rules on applicability of tax deductions. And the Department of Energy concentrated on making licenses available, accelerating development approvals, and-after a series of mishaps that began with the fatal 1988 Piper Alpha platform explosion-tightening safety regulations.

DRILLING SURGE RESULTS

This year's drilling outlook demonstrates the results. Technological advances deserve much of the credit, of course. Even with oil prices at $16-18/bbl, newly streamlined companies employing new equipment, designs, and procedures can economically develop small fields that they would have bypassed a decade ago, when prices approached $34/bbl. Yet they'd be plying their technological prowess elsewhere if the U.K. hadn't kept its fiscal and regulatory regimes in step with economic and geologic realities.

British energy policy isn't perfect. But it doesn't deserve the blame it sometimes receives for diminished state revenues from offshore petroleum operations. The past decade's market and industry upheavals made a smaller government take inevitable. British policy succeeds by aiming to protect the future of the offshore tax base, by recognizing the importance of drilling to that future, and by consistently offering licenses on acceptable terms to the taxpayers who conduct the work.