Monday 12 January 2015

Osborne has deathbed conversion moment on North Sea oil taxes

I have never liked George Osborne, his continuity Brown economics - i.e. shirking cuts and raising taxes, are one of the main reasons I don't really fear a Labour Government. Both the main parties have almost identical economic policies - bar the odd Labour lunacy like the Energy price freeze or Mansion tax that will do much for the gaiety of the nation when implemented.

One of Osborne's worse decisions though was to try to hold down petrol duty for consumers by increasing levies on the North Sea. He did this at a time when much of the North Sea development areas had been taken on by minnow AIM companies such as Encore, Xcite or Faroe Petroleum or smaller FTSE companies like Premier Oil. BP, Shell and Chevron had hugely reduced their exposure, only maintaining existing assets like the Forties field.

As such, these smaller companies were a risky bet (hence my crazy investment in them!), which became disastrous on the back of these tax changes when allied to the wall of cheap money generated by Quantitative Easing. QE meant that yields dropped and fund managers, awash with liquidity, looked for any sort of yield rather than capital growth. So AIM has been denuded of investment for 3 years now. The North Sea oil taxes were a trigger for the fall in investment. Of course, the recent plunge in the oil price has further hammered the business plans of the small oil co's anyway.

You can now find them at 1/10th of their 2011 prices, still not looking like good investment either. North Sea exploration and new production has collapsed - which to some extent it was always going to given decline in the fields. The new fields being found are new and expensive and will not work with oil at $40 or so which looks like where we are headed.

However, if in 2011 taxes had not gone up, perhaps some of the smaller Oil Cos' could have borrowed the money and now they would be coming on stream, yes to a difficult time in the market - but markets go up and down. Instead, none of them got funding and the oil remains in the ground.

We said at the time what a short-sighted move this was, now that we fast forward 3 years, Osborne has seen his mistake but it will be a case of too little too late for many of the North S


Nick Drew said...

if it was onshore, you'd say 'at least the stuff is still in the ground'

but when you close down a big offshore facility, you don't re-start it again

Anonymous said...

exactly Nick, there is a reason M&A is at record lows in the Norht Sea.

And I did not even mention the ever increasing decommissioning costs due to stricter environmental regulations since the BP disaster.

Many 'assets' are increasingly being seen in the industry as 'decom' projects with a small revenue stream upfront. Another post perhaps...

BE said...

I agree with CU, as usual.

However, I wonder whether the Capitalists have now changed their view on other policies over the last few years, especially on QE.

We were constantly told by people like Tim Worstall, who quote half of Milton's axion on inflation, that QE would guarantee hyperinflation eventually.

Does the flattening out of prices and the slowdown in the recovery mean that we have not have *enough* QE yet?

Suffragent said...

Its worse than that. When you reduce investments in sub-sea development around existing rigs ( the rig is used as a hub to service smaller fields and therefore offset running costs), the viable lifespan of the rig is reduced and the potential smaller fields are also gone.

Nick Drew said...

yes indeed, suff - how much has depended on those Forties-type systems ...

which leads me to another thought: must post on Brent itself

Electro-Kevin said...

Though I loathe Labour there seems to be nothing much to lose by voting Ukip.

dearieme said...

"bar the odd Labour lunacy like the Energy price freeze or Mansion tax that will do much for the gaiety of the nation": allow me to add a Rent Act to your short list. Although I would briefly enjoy the discomfiture of the "you can't go wrong with bricks and mortar" idiots, it would be a very damaging policy.

Budgie said...

BE said: "We were constantly told by people like Tim Worstall ... that QE would guarantee hyperinflation eventually. Does the flattening out of prices and the slowdown in the recovery mean that we have not have *enough* QE yet?"

Well, Tim Worstall doesn't know what he is talking about then. QE was essential to counteract the inevitable slump in money supply post crash. We would have had deflation otherwise.

The halving of the oil price is supply and demand driven with an unhealthy dose of political manoeuvering added. But the knock on effect will boost the economy (UK, not Scotland's). Even though (some) prices are coming down this is not deflation because the money supply is still increasing (M1 has risen strongly over the past two years).

With an eye on M1 and M2, assuming their continued increase, QE would be the wrong response.

BE said...

"Tim Worstall doesn't know what he is talking about then"

Indeed, and neither did I back in 200whenever. Glad the Bank took no notice of me, either.

Thanks for the M1 and M2 eye. UK NGDP seems to be doing OK as well, so probably no need for extra printing right now.

However, I would like to know what the gold bugs make of all of this.