WATCHING THE WORLD U.K. TAX MESSAGE

With Roger Vielvoye from London For the past few months leading industry figures have been spreading the message that because of rising costs and falling field sizes, Britain's tax regime needs changing. And the changes should assure that enough new field development projects come forward to prevent Britain from again becoming a net importer of crude oil before the turn of the century.

Sept. 9, 1991

3 min read

For the past few months leading industry figures have been spreading the message that because of rising costs and falling field sizes, Britain's tax regime needs changing.

And the changes should assure that enough new field development projects come forward to prevent Britain from again becoming a net importer of crude oil before the turn of the century.

It has not been an easy message to get across. The North Sea is undergoing a surge of activity with drilling at record levels and operators and suppliers working flat out to bring new oil and gas reservoirs on stream at regular intervals.

UKOOA'S CASE

During last week's Offshore Europe '91 conference in Aberdeen, it fell to Harold Hughes, director general of the U.K. Offshore Operators Association (Ukooa), to take the case a step further. He warned that the end of the surge could be in sight, and within 2 years construction yards could be working at half the present pace.

Current activity levels, said Hughes, are sustained only by determined efforts of everyone in the industry to respond to the pressure of lower oil prices and oil field inflation of about 20%.

Hughes recalled a Ukooa forecast that Britain could remain self-sufficient in oil at least until 2000 and maintain a substantial industry for a further 25 years. But unless everyone in the industry "got their sums right," development projects underpinning those forecasts might not materialize.

If the U.K. government wants the advantages of self-sufficiency and the spinoff for the national trade balance to continue thought must be given to reducing the tax take, he said.

The government's counterattack took an unexpected angle. Secretary of State for Energy John Wakeham steered away from the question of taxes and instead disputed the oil companies' contention that costs are rising.

Wakeham claimed major oil companies had been prominent in publicizing a widespread perception that North Sea development costs are rising much faster than general inflation to the point that viability of some marginal fields is threatened.

Wakeham said evidence from the U.K. Department of Energy does not wholly support that view. Ministry figures show the average costs for fields in production last year were more than $16/bbl, while costs for fields under development were $11.46/bbl.

WAKEHAM'S VIEW

Backpedaling a little, Wakeham then said those figures do not mean that unit costs might be rising quickly this year as suppliers sought to take advantage of high levels of demand to restore profit margins.

The industry's contention that costs have been rising sharply may be due to a combination of an underestimation of original costs and of market forces at work in response to rising demand, he said.

Again ignoring the tax question, the minister then switched the attack to suppliers and warned them not to be tempted into using the present high level of activity to maximize profits at the expense of future orders.

Whether the oil companies' tax campaign has made any progress remains, to be seen.