The U.K.'s eruptive political campaign has produced little commentary about future oil and gas production in the British North Sea. Perhaps it should.
A reconstituted Labor party under Neil Kinnock stands a good chance of ending 13 years of Tory rule on Apr. 9. The electorate in general is angry about the U.K.'s sluggish economy. A hung Parliament, in which neither major party wins a majority of seats, is possible. In that case, the victorious party would have to deal with minor parties in order to form a coalition government. If that didn't work, it would have to seek dissolution of Parliament and plan another election.
WELCOME SILENCE
In a period of Labor resurgence, the oil industry has good reason to welcome silence regarding oil and gas taxation. The party, which claims to have shed its socialist past, does propose a moderately interventionist energy policy. Among other things, it would protect U.K. coal markets at the expense of natural gas. North Sea production, nevertheless, seems largely unthreatened.
So far the campaign has amounted mainly to a clash of budgets. John Major's Tories propose a modest tax cut and reliance on market forces to energize the economy. Kinnock would offset tax cuts for 80% of the voters with increases for the rest and raise government spending in some areas. In no area does the candidate of either major party incline toward political extremes.
The election might produce action on the Scottish independence issue. Possible outcomes range from establishment of an independent Scottish assembly to outright secession. Much depends on how various minority parties do in the voting and, perhaps, their bargaining positions in a coalition government. The prospect of an independent Scotland raises huge questions for the North Sea petroleum industry.
Political uncertainty comes at a bad time for British North Sea oil and gas operations. They have been hurt by sluggish oil prices and the U.K. recession. And, as a study by the Centre for Global Energy Studies (CGES) shows, investment needs are great.
CGES says British sector fields under development in mid-1991 and current candidates for development will require capital investments totaling $38 billion for oil and liquids production with peak rates totaling 1.86 million b/d. The study examines what CGES calls "investment intensity" individually for 46 U.K. fields and 17 Norwegian fields and says capital expenditures excluding exploration costs exceed $10,000/b/d of peak production capacity for most. In some cases, investment intensity reaches $30,000/b/d. By comparison, most Persian Gulf investment intensities are less than $5,000/b/d.
CLOSE TO MARGIN
The study also calculates "fully built-up economic costs" before taxes for each field. Results vary. What's clear is that future North Sea development work, typically involving smaller and more complicated discoveries than their predecessors, will run close to the economic margin unless oil prices rise, which many operators seem to assume. Oil price declines, which are not beyond reason, would imperil many projects. To their credit, the U.K.'s leading politicians haven't added to the offshore producing industry's uncertainties with threats of higher taxes or stiff new regulation. That's in step with the government's accommodating stance toward the industry in recent years. Indeed, the U.K. government has done better than most at keeping its tax regime in line with resource maturation and the business realities of a turbulent oil market. For the sake of U.K. economic health, that's the course that any prime minister from any party must continue to follow.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
