Monday 7 September 2015

Better policy needed for North Sea to stave of shutdown

The North Sea, the pot of Gold for Independent Scotland, is in the worst crisis since 2008/9. With Oil prices hovering around $50, the highest cost oil producing region in world in understandably in trouble.

Jobs are being lost and contracts are either not being renewed or cancelled. Several of the international oil majors are pulling out of the region and looking to sell their remaining fields.

Moreover, the Government Regulator is fixated on De-Commissioning costs, over and above the cost of production. Laughingly a couple of years ago Executives were wondering whether to buy older fields as they balanced the income against the decom cost to see whether there was any economic point in acquiring; it came up as a no surprisingly often.

However, this is still a significant chunk of UK industry and know-how. Yes, all those Scots can offski to Dubai and the Far East for lives of expat bliss, much as shipbuilders once did.

Is there a way though to actually keep the oil following for the next 10-15 years and make the most of what we have?

The answer must be yes, but will require more Government flexibility. One hit the Industry took was Osborne raising taxes in his first budget in 2010, when prices were still high. Now that prices are below cost, there needs to be a severe relaxation of the tax regime to encourage companies to stay in business. Gordon Brown had his much maligned fuel-price escalator....but there is a kernel of an idea there.

The world now moves much faster that it used to, business is connected and the markets are connected globally to a very highly-correlated extent. Government budgets and taxes are set on an annual basis - Companies don't like too much change because they want to plan expenditures.

For oil though, the biggest variable is the price of the product, over which the companies have no control - a bugger of a business. So why not get the Government to set moving tax thresholds set on a moveable price.  The difference to today, where the percentages are set (providing some market balance), would be that different tax thresholds would come into play over quarterly or bi-annual periods. When the price of oil was very low there would be negative taxes to ensure employment and the industry continued, made up for when prices were higher by higher bands. The next impact would be that cash flows for the North Sea companies would be more stable - but better than the huge breaks given to the fortunate few like Chevron and Maersk but not to the likes of Ithaca or Enquest.

Government needs to be more flexible in its approach, else a whole industry will be gone before we know it. Oil prices are going nowhere but down for the next few months and years maybe, so without action the North Atlantic shelf will not survive the competition from the US Shale boom - or indeed a growing potential UK shale boom.


Nick Drew said...

moving tax thresholds set on a moveable price

PRT was initially designed to achieve this - but always too complicated (understatement) and clunky. It ain't an easy trick to pull off, and even then would be subject to annual Budget tinkering for whatever is the politics of the hour, Osborne has plenty of form on this (his 'Fuel Duty Stabilizer')

the fortunate few like ... Maersk

the recent announcements on their big & extremely welcome Culzean development are vaairy interesting: you have to search very hard indeed to find out where the gas will be landed, try googling (hint: it ain't Scotland, whatever they would like people to think)

such reticence in giving this simple detail is, I think, quite politically revealing

Steven_L said...

If no-one wants the oil at the price the oil companies need to stay solvent, why can't the Bank of England just print money and buy it at 'fair value'?

What's sauce for the goose and all that...

Steven_L said...

So why not get the Government to set moving tax thresholds set on a moveable price ... When the price of oil was very low there would be negative taxes to ensure employment and the industry continued, made up for when prices were higher by higher bands.

Kind of like a state backed 'contract for difference' to mitigate risk for people who own shares in oil and gas companies you mean? I guess we could extend this concept to other long term, job creating, risky investments like nuclear power and wind energy?

CityUnslicker said...

SL - Not interested in my own minisule North Sea investments, so not talking my own book. Am interested in the North Sea collapsing due to transient market forces (i.e. a few years) as the skills based economy is something to protect. We have a huge wave of burger flipping immigrants for the services jobs, the knowledge ones could be defended - not like the treasury has not benefited from the oil taxes for the past 30 years, quid pro quo.

Which ,incidentally, is why it is not like Wind or Nuclear - no tax payoff there at the end of the subsidy, more likely another handout.

OIl is different; it may prove to be a profitable 'investment'

Steven_L said...

But nuclear and renewable jobs are 'knowledge economy' jobs too aren't they? Isn't this just a case of you 'picking winners'? It's not that long ago ND was on here telling us $40 oil was a boon for George Osborn.

The North Sea won't 'collapse'. Some of the firms might go bust and have to sell their 'assets' for pennies to cash rich folk / megacaps. Most of the 'north sea' is owned by the Norwegian government anyway.

There's are a few folk being laid off up here, a few getting around to quitting their anti-social offshore jobs and a few onshore workers having to think twice about whether to sign up for a new Porsche on PCP.

But that's just the price they have to pay for my daily commute getting cheaper. If they didn't save in the times of plenty (and I reckon a lot of them did blow it all on fast women, pokey new-build flats and supercars) that's tough luck really.

Personally I'm starting to think about building up a long position on some of the majors - Shell, BP, Exxon, Chevron etc.

If you like more risk, the FCA spreadsheet suggests the big hedgies are starting to close their Tullow and Premier Oil shorts.

CityUnslicker said...

they are only closing their Premier shorts because its best to have nothing to do with an actual failure.

Your points are well made, but really the collapse thing is a decent sized risk. Once majors pul of of JV's the minnows are fried; the minnows have had no access to Bank funding since 2011 as it is.

Steven_L said...

But why would subsidy for UK oil and gas drillers be any different from subsidy for UK coal miners?

The point of maximum fear is the time to buy. I'm not sure if we're there yet or not, but you sound pretty spooked to me!

Ryan said...

Ah remember the heady days of Scottish independence talk?

Well here's a perfect graph of the probability of that paying off:

CityUnslicker said...

SL - You may well turn out to be right. IN 2009 some smaller oilies were down at tuppence a shance and recovered to several pounds. 50% did not make it - a great risk/reward opportunity it was.

Kynon said...

Nick - one also has to cast around quite thoroughly to find any of the actual design & build EPC work for Culzean being done in the UK; pretty much all been shipped overseas - so while it's a UK field development, there's little benefit for the UK other than tax take.

I think Steven_L's assertion of "a few" people being laid off is a teeny bit on the side of understatement...however I share his lack of sympathy for those who have splashed their cash up the wall in the good times!