Why I’m not signing up to Osborne’s feelgood factor

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This article originally appeared in the March edition of Energy North

Written by Andrew Bradshaw.

I had to renew the contract for my mobile phone recently. The two years were up and I spent an unacceptable amount of time with somebody in some faraway place, agreeing to a new device, the number of minutes and amount of data I would get, and the cost of it all.

At the end of it I felt I had been beaten into submission, bamboozled with figures and the perceived benefits of all the wonderful things that would be available to me thanks to my wise decisions. Apparently, my life beforehand had been confused, complicated, difficult. In this new Nokia Nirvana everything would be fantastic and simple.

Two weeks later the phone arrived. As a device it appears of a lower standard than the one I had previously (the camera has no flash for Heaven’s sake!) and I am paying more for it. However, I do have the freedom to talk and see twice as much rubbish as I did before… and that’s supposed to be a good thing.

I was sceptical about the brighter and better world I was being offered by my phone provider, in the same way that I am sceptical about the alleged dawning of a new era for the North Sea oil and gas industry, as heralded by Chancellor George Osborne in his recent pre election budget statement.

Like my mobile phone salesman, Mr Osborne aimed to induce a feeling of enthusiasm and support for what was being said. He was delivering benefits. We should be relieved, energised to go out and explore and produce, even grateful.

The initial reaction from many in the industry has been positive. Sir Ian Wood described the budget as “the essential lifeline” from the Treasury to allow the industry to start building confidence once again in the UK Continental Shelf.

The package of changes, he said, would increase recoverable reserves from 12 billion barrels to about 15 billion barrels by 2050.

Malcolm Webb, the chief executive of Oil & Gas UK, said the budget laid the “foundations for the regeneration of the UK North Sea”.

He said the Chancellor’s measures could incentivise an additional £4billion of capital investment and added: “I commend the government for its long term vision.” Similar encouragement came from the new regulator, the Oil and Gas Authority.

I have had to ask myself if the problem lies with me. Why don’t I get the Osborne feel good factor?

To recap, the Chancellor announced a range of measures which it was suggested were worth £1.3billion and which would help reinvigorate a depressed North Sea.

These included a “single, simple and generous” tax allowance including a reduction in the supplementary tax from 30% to 20%, backdated to January of this year. The Petroleum Revenue Tax, which has been a significant source of resentment over the years, is to be reduced from 50% to 35% with the aim of supporting continued production in more mature fields.

A further measure announced was an investment of £20million in new seismic surveys in under explored areas of the UK Continental Shelf to try and offset the well-publicised decline in exploration, which we have seen in recent years.

All good. However, it has been argued that most oil companies will still pay a marginal rate of tax of 50%, when corporation tax of 30% is taken into consideration. And for those who pay Petroleum Revenue Tax (PRT), their marginal tax rate will come down from a whopping 80% to a still significant 67.5%.

The opportunity had been there to scrap the PRT completely, and you have to assume that’s the way that this tax is going, for the Treasury has made encouraging noises about its abolition previously.

What is coming through loud and clear from everyone is that, whatever its limitations, the Government has done something to support the oil and gas industry in the North Sea: it is now up to the industry itself to show its commitment.

And that’s at the core of my scepticism. In these difficult times, will the oil and gas industry step up and stick by a region that has served it so well over the past 40 years, or will it move on to more economically viable pastures new?

An oil price hovering around the US$55 per barrel mark, with no signs of a respite in the short term (unless OPEC does an about turn on production levels at its June 5 meeting in Vienna) is not good for the North Sea, where it has been estimated one third of fields in UK waters are unprofitable at even US$60 per barrel. An ending of the economic sanctions against Iran over its nuclear programme could add a further one million barrels of oil per day to global supplies

Against a strong dollar, a refusal to back down on production from OPEC’s leading players Saudi Arabia and the United Arab Emirates and a potential tsunami of Iranian oil joining the ocean of black stuff that’s already out there, has George Osborne done enough to encourage the industry to stay here? Could or should he have done more? I want to believe him and all others who see a better short-term future but, unlike my new phone, until I see more commitment from the industry I am not buying into it just yet.

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