Britain's surprise tax increase on North Sea oil and gas output, met with protest by the industry, is unlikely to jeopardise profitability or investment and may create opportunities for smaller companies. On Wednesday, the government raised a supplementary tax on production to 32 percent from 20 percent, sparking a drop in share prices for North Sea-exposed companies such as Canada's Nexen.
The increase means the effective tax rate for many North Sea fields has more than doubled in less than a decade, according to accountants KPMG. But while taxes have risen, so have oil prices, with Brent crude trading at $115 a barrel on Friday, an unthinkable price in 2002 when it sold for just $20. "The conventional oil project is still quite economic with these terms and these oil prices," said Nick Copeman, an analyst at Oriel Securities.
"If you make an oil discovery you can still bring it onstream and make a good return on your money. It's less than it was before, but it's still quite a good return." The tax rise brings the rate on UK fields to at least 62 percent and to as much as 81 percent for some of the oldest. But in Norway, which also shares the North Sea with Britain, oil companies pay 78 percent tax.
Oil and gas production in the UK North Sea has passed its peak as the larger and easier-to-tap deposits have been pumped out. But geologists say there are still billions of barrels left to produce in smaller accumulations. The government on Thursday defended its decision to increase the tax, saying it expects higher oil prices to help the investment outlook.
"Because of the rise in the oil price we have a lot of resources available to operators in the North Sea," UK Energy Secretary Chris Huhne told Parliament. "I would be very surprised if there wasn't a continued increase in investment." The oil industry condemned the tax increase announced by Chancellor of the Exchequer George Osborne in his budget on Wednesday.
"This change in the tax regime will decrease investment, increase imports and drive UK jobs to other areas of the world," said Malcolm Webb, chief executive of trade group Oil & Gas UK. One consequence of a less attractive and more uncertain fiscal regime could be to speed up divestments by big oil companies, which have been looking to reduce exposure to existing fields in the North Sea.
Energy giants like Exxon Mobil, Royal Dutch Shell and BP have all put assets in the region up for sale in recent months. British oil firms Premier Oil and Enquest are looking to buy North Sea assets. "If the majors can't invest because of the uncertainty around tax terms or are unwilling to because of the returns they get, it might accelerate their exit from the UK which may create more opportunities for small companies," Copeman said. Premier said on Thursday the tax hike would have minimal impact and could aid the company's own acquisition plans by making North Sea oil assets cheaper.
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