North Sea oil and gas

In a new book soon to be published, he argues: \”UK oil and gas production has been steadily declining since 1999. The reason is that the UK government, unlike those of most other countries, has abandoned oil and gas production to the private sector and has failed to create attractive conditions for private companies to invest more.\”

Well, yes, but perhaps this isn\’t the solution:

He adds: \”The government should follow the example of Norway and many other countries by setting up a hydrocarbons authority, which would initiate new private-public partnerships to engage in offshore oil and gas production. This would generate many billions of pounds in highly needed revenues.\”

It could just be that, err, it\’s the last part of that first quoted para that\’s the important part.

The last time a windfall tax was imposed on North Sea operators in 2005, it brought short-term gains to the Treasury but led to a slump in drilling activity that ultimately cut tax revenues.

Or perhaps:

The way the government taxes oil companies is also coming under the spotlight. The tax rate is 50 to 75 per cent, depending on the age of the field. It is hard to compare this with tax regimes around the world. In Norway, the government levies a slightly higher tax rate of 78 per cent. But, crucially, it allows companies to offset the entire cost of exploration as tax relief, even if that exploration does not yield any oil. In the UK, companies can only claim tax relief against exploration if the newly explored field starts generating revenue.

Maybe the fuck up is in what government is already doing….meaning that having government doing more might not be the most entirely logical of solutions.

Perhaps if they just taxed less there would be more oil being pumped up?

Like, perhaps, the BP Peterhead project? The idea was to strip natural gas of the CO2, burn the hydrogen and use the CO2 to pump up the last oil from a field. All that BP wanted was that they pay lower per barrel fees on the oil they pumped up. If they didn\’t do the scheme then the oil wouldn\’t be pumped up at all. If they did then there would be extra revenue for the Treasury, albeit at that lower rate. So on nett the scheme would have been an addition to the Treasury.

Gordon Brown turned it down of course.

This is one of the problems we progressives have. Sure, of course government can make life better through the powers of government. But all too few who subscribe to this idea, who call themselves progressives, also subscribe to the obvious point that often this can be by government stopping using its powers to do some of the damn fool things it already does.

Like, for example, if you want to increase oil and gas production from the North Sea you might want to think about taxing it more lightly?

12 thoughts on “North Sea oil and gas”

  1. The UK’s energy industry has been heading downhill eversince it was privatized, bring it back into public ownership asap!!

  2. “The last time a windfall tax was imposed on North Sea operators in 2005, it brought short-term gains to the Treasury but led to a slump in drilling activity that ultimately cut tax revenues.”

    Oh, look; a Laffer curve.

    “All that BP wanted was that they pay lower per barrel fees on the oil they pumped up. If they didn’t do the scheme then the oil wouldn’t be pumped up at all. If they did then there would be extra revenue for the Treasury, albeit at that lower rate. So on nett the scheme would have been an addition to the Treasury.”

    Oh, look; another one.

  3. …….The reason is that the UK government, unlike those of most other countries, has abandoned oil and gas production to the private sector …….

    Unlike say, Venezuela, or Mexico, where benevolent state ownership has led to decades of under investment and falling volumes. Russia, where mafia tactics have driven private competitors out, and a big crunch is on the way.

  4. I hope we get to do this as income tax payers – ‘Dear HMRC, at the current flat rate of 20% I am paying £x k in tax, but if you charge me only 10% then I’ll get another job and pay more in tax than under the 20% rate’.

  5. We can and do do this as income tax payers Matthew. Perhaps not at the 10%-20% range, but probably at somewhere between 40% and 50% that is exactly what income tax payers do. We may not enter into individual negotiations with HMRC, (there are rather more income tax payers than there are oil companies, what is feasible for one type of tax payer is not for another type) but nonetheless by our actions we do collectively say that we will pay more tax at 40% than 50%. (We also told Lawson that when he dropped 60% to 40% and increased the tax take).

  6. Funny how Thatcher was condemned for supposedly extracting as much oil as possible and selling it off, but now it is the private sector which is at fault for not extracting enough.

    There’s an implication from some quarters that maximum oil production under a Labour government is good, because the revenue will be used for righteous purposes, but under any other government, the revenue will be wasted and therefore any extraction is tolerable at best.

    Personally, I don’t see why extraction rates need to be high. If the price of oil is generally on an upwards curve, leaving some of it in the ground to increase in value would seem a perfectly sound strategy.

  7. Statoil is the best run national oil company by a mile, but even they suffer from the same problems the rest of them do, albeit to a much lesser extent.

  8. “leaving some of it in the ground to increase in value”

    Apparently (I forget the source, as usual), BP have more oil in untapped reserves now than they have extracted in total.

  9. leaving some of it in the ground to increase in value would seem a perfectly sound strategy.

    Erm, Paul?

    What about the time value of money? If I take my shareholders’ money and invest it in exploration, they* rightly expect a fairly rapid return on their investment. Either that or the expected growth in long term price is going to have to exceed the discount rate by some decent margin.

    Mr Newman might be able to inform us what rate the oil industry uses, but the mining industry generally discounts cashflow at 11% for fairly safe investments (prospects in dodgy countries get discounted at higher rates, as do prospects about which we know little or if they are being offered for sale by men with big moustaches). What annual growth rate do you expect for the oil price over the next ten years?

    *”They” being not nasty capitalist bastards but armies of little old ladies who have invested their meagre pensions in my company in the expectation they will be able to enjoy a long retirement happily causing mayhem in post office queues and feeding their pet moggies.

  10. “Erm, Paul? What about the time value of money? If I take my shareholders’ money and invest it in exploration, they* rightly expect a fairly rapid return on their investment.”

    Some might want quick yield, but other investors invest for the long term. Let’s also not forget that were talking about revenue being received by the state as well as by the oil company. The relevant issue is how quickly the state enables extraction to happen and how it impacts on revenue.

    “Either that or the expected growth in long term price is going to have to exceed the discount rate by some decent margin.”

    Maybe it will.

    “What annual growth rate do you expect for the oil price over the next ten years?”

    I don’t. On that basis, I’d view a steady rate of extraction to be a safer strategy than extracting it at breakneck speed and selling it all today in a market where my high rate of supply will potential push down prices.

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