OIL PRICES: NORTH SEA NIGHTMARE

Sir Ian Wood, the Aberdeen-based billionaire and energy industry veteran, has given warning that tumbling oil prices will have a "horrible effect" on North Sea prospects.

Sir Ian urged ministers to act urgently on proposed tax reforms to avoid damage to exploration and output. "We are at a pivotal time and what we must be very careful of is that we don't see the industry being damaged," he told the Financial Times in an interview.

"This is not an industry where you can say, 'OK, we'll slacken off for a couple of years and we'll pick up where we left off.' We'll lose key assets, we'll lose key people and we may even lose some of the confidence of investors that the North Sea really is an important medium-term play. We must avoid that."

Danny Alexander, chief secretary to the Treasury, met oil industry executives in Aberdeen on Thursday to discuss changes outlined in the government's Autumn Statement, including a cut in the supplementary charge levied on companies' profits from 32 to 30 per cent.

The Treasury said in a document published on Thursday that it would consult on introducing a "basin-wide" investment allowance to simplify and replace a complex system of offshore field allowances that had deterred investment. It would look at options to encourage exploration through the tax system, such as a tax credit, and there would be support for seismic surveys in under-explored areas of the UK continental shelf.

This week's measures follow the publication of a report by Sir Ian in February which called for a "tripartite approach" of closer co-operation between the Treasury, Department of Energy and Climate Change and the oil companies, designed to maximise recovery from the North Sea.

Industry figures show that, while investment has risen to record levels, total North Sea oil and gas production for the first 10 months of 2014 was 348m barrels of oil equivalent, or 1.43m boe per day — down 1 per cent on the same period last year, extending a longer-term decline.

The near 40 per cent slide in crude prices since mid-June is likely to curtail capital expenditure plans. Sir Ian said the plunge in the price of Brent to $70 a barrel would have "a horrible effect" and the industry would respond by cutting costs wherever it could. "Some fields will probably close down," he said.

"The North Sea is a mature region. It's quite an expensive region, which is in reasonable shape in high prices, but in very difficult shape in what is now effectively towards the lower end of the price market."

Sir Ian and other executives welcome the government's proposals to reform investment allowances. Mr Alexander said the cut to the supplementary charge sent a "vitally important signal", adding: "We will not stop there."

However, James Edens, managing director of Canadian Natural Resources, told the minister: "The speed of change here is too slow. The worldwide competition for capital is too intense. You must speed up; you must accelerate. The basin won't survive if you don't."

Glen Cayley, upstream director for Shell UK, said that while this week's measures reflected dialogue with the industry, "with the new low oil price we are all looking again at affordability; we are all looking again at how competitive investing in the North Sea is."

Alistair Dunbar, oil and gas tax specialist at PwC in Aberdeen, said of the proposed reforms: "It remains to be seen if there is appropriate balance between the benefit of simplicity and the need to encourage investment. In particular, there will be concern to ensure that the new approach can cater for the larger, more difficult projects that were supported by the previous approach of complex specific allowances."

ft.com