Oil tax to impact future North Sea development……. Several emerging oil regions would benefit from a step-up in Big Oil investment

The UK government’s £2 billion windfall tax on North Sea oil producers could stymie future development, leaving valuable reserves untapped. Oil producers will now pay 32 percent tax, rather than 20 percent, on the oil produced in UK waters in the North Sea. The tax changes will reduce investment in the North Sea.

Exploration and production spending has increased by 60 percent in the past two years, which has stemmed declining production and extended oilfield life-spans. But the tax hike will now have exactly the opposite effect.

In the short term expect to see a noticeable reduction in exploration capex and an increase in the number of postponed investment decisions.

“Looking further out, the tax rise is likely to have a meaningful negative impact by way of reducing the absolute number of future development projects. Importantly, this ultimately means that more oil will be left in the ground, and over the long run this will likely generate a lower total taxable income stream for the government.”

Keith Morris, head of research at Evolution Securities, warns to expect a backlash from the industry, which wasn’t consulted on changes that takes the effective rate of taxation in the North Sea to an eye-watering 82 per cent.

Meanwhile, Liberum Securities’ Andrew Whittock said: “The UK North Sea has just become a less attractive place for new investment so future prospects for North Sea work have dimmed.” 

If UK North Sea oilfield development and exploration stops, how would companies replenish the ever depleting reserves?

There are several emerging oil regions that are on the cusp of serious development and all of them would benefit from a step-up in Big Oil investment. At least in terms of geography the Celtic Sea may present one option. The Celtic Sea has been in the spotlight of late, particularly with Providence Resources planning a multi-well drill programme on known discoveries.

Now a new wave of exploration and appraisal work will reassess these prospects, against a backdrop of higher fuel prices and more efficient recovery techniques.

Africa is fast becoming a top destination for offshore exploration and development work, with both flanks of the continent attracting investment from the majors.

Anadarko, BG Group  and Cove Energy  have had success off the east coast and Tullow Oil, Aminex and Dominion Petroleum have high-impact projects up their sleeves. Meanwhile, on the continent's western coastline Tullow Oil’s success in bringing the Jubilee field into production has been the highlight so far.

South America is another potential hot-spot. A group of majors are drilling in the deep waters offshore Brazil, notably BG has made a number of discoveries here. Meanwhile Tullow Oil, Shell and Total - along with Wessex Exploration and Northern Petroleum – are drilling high-impact, deep water targets offshore French Guiana.

Further south, the credibility of the Falkland oil frontier received a shot in the arm recently after Rockhopper Exploration’s  successful Sea Lion appraisal well.

Key UK North Sea assets on the market

Sellers	Heading	Value Range ($m)
ConocoPhillips	To divest assets worth $5-10 billion in 2011-12	1,000 - 10,000
BP	To sell certain UK North Sea assets	1,000 - 10,000
EOG	To farm out interest in UK North Sea block	5 - 10
ExxonMobil	To divest interest in four UK North Sea blocks

Source: Derrick Petroleum E&P Transaction Database