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The latest effort to increase investment in the UK North Sea involves tax allowances for brownfield projects. UK officials hope the move not only attracts more development, but also creates jobs.
A new tax measure that aims to boost investment in older oil and gas fields in the UK North Sea could spur development and create jobs in the area.
The announcement, delivered Sept. 7 by Chancellor of the Exchequer George Osborne, revealed some brownfields would be shielded from part of a supplementary tax charge on companies as encouragement to maximize investments in existing fields and infrastructure on the UK Continental Shelf. The tax allowance would shield companies from the 32% supplementary charge rate on up to £250 million (US $400 million) of income for qualifying brownfield projects, or £500 million ($800 million) for projects in fields paying the petroleum revenue tax.
“Today’s tax allowance is more good news for the North Sea, good news for jobs, and good news for the broader economy. It will give companies the incentive to get the most out of older fields, creating jobs, and delivering more revenue for taxpayers,” Osborne said. “This government has signaled its absolute determination to get more investment in the North Sea, a huge national asset.”
The UK, the largest oil producer and second-largest natural gas producer in the European Union, has been coping with a steady production decline. In 2010, 1.4 MMbbl/d of oil were produced in the UK, compared to 1.6 MMbbl/d consumed, US Energy Information Administration (EIA) figures showed. Natural gas consumed in the UK climbed to 3.3 Tcf in 2010, while the area produced only 2.0 Tcf that year. Most of the UK’s oil reserves are located in the UK Continental Shelf in the North Sea, but there also are large reserves in the North Sea north and west of the Shetland Islands.
According to the EIA, the UK had been a net exporter of oil and gas until 2004-05, when it started importing gas and crude oil. Production from the UK’s oil and gas fields has been declining since the peak in the late 1990s, with new discoveries failing to keep pace with declines in maturing existing fields. The Guardian reported UK hydrocarbon production dropped 19%, with half as many exploration wells being drilled in 2011, compared to 2010.
The latest initiative came as the UK government continued its efforts to develop energy policies and incentives to address declining production. Efforts to address dropping domestic production figures have included: enhancing recovery from oil and gas fields, ensuring energy security, promoting cooperation with Norway, and investing in renewable energy, according to the EIA.
The most recent initiative sparked words of support from Oil & Gas UK. Mike Tholen, the organization’s economics and commercial director, called the move a “strong signal of the government’s commitment to make the most of UK’s oil and gas resources” to benefit the area’s energy security, public funds, and jobs.
Oil and gas brownfields in the UK typically have operating costs, Tholen said in a statement, and are subject to up to 81% tax on production. “We believe in the near term [the tax allowance] should rapidly lead to a number of new investments amounting to £2 billion, create many thousands of high skilled jobs, add tax revenues of over £1.5 billion, increase oil and gas recovery by 150 MMboe, and have a further long-term impact. We recognize this is an ongoing dialogue, and we will continue to engage constructively with the Treasury on appropriate means to promote investment.”
Apache Corp. is among the companies that could benefit from the tax break, though the company could not divulge at the time any planned investment details. Having entered the North Sea in 2003 by acquiring a 97% working interest in the Forties field, which had 45 producing wells, the company now has 75 producing wells in the field, according to its website. Apache also has interest in other fields in the region; however, the Forties is its largest.
The chancellor’s news was welcomed by Apache. “We’ve been watching for this, and we are very encouraged,” said Bill Mintz, a spokesman for Apache Corp.
Although the move was praised by those in the industry, it could bring some challenges, particularly with generating enough workers if the tax break sparks investment and brings job opportunities as hoped. In a news release, Matchtech, a UK recruitment firm, pointed to a report by the PricewaterhouseCoopers accounting firm that revealed Aberdeen’s status as a global energy hub is threatened because of a shortage of skilled workers. The report also noted that 120,000 new recruits would be needed to replace the depleting workforce.
“The simple fact is there just aren’t enough engineers with oil and gas experience to fulfil this demand,” said Keith Lewis, Matchtech’s managing director. “Oil companies must look beyond the current crop of oil and gas engineers and begin to embrace those from other industry sectors. And now, with the chancellor’s latest announcement today, is the best time to do this. This will be crucial in turning the monumental task into a reality.”
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