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

Brent Market : Another British Interest to Defend

It's familiar enough to see oil quoted in terms of the price per barrel of Brent oil.  Perhaps less well-known, the price of Brent - a declining North Sea field - sets crude oil prices for around two-thirds of the world's oil and is the cornerstone of global financial oil trading, the forwards / futures / options markets, whether for hedging or speculation, arbitrage or market-making.  And so London rules the roost in global oil trading, which is a seriously big deal.  (A significant amount is OTC trade, so there are no definitive figures on how big.  But it's Very Big.)

That's despite a number of factors one could imagine working against it:

• the amount of actual Brent production is not very great any more
• the logistics of physically settling a Brent contract (i.e. actually taking delivery of a cargo of Brent) are pretty complex - the preserve of relatively few specialist energy companies and traders
• the financial aspects of Brent trade are unusually complex, too (relative to other paper-traded commodities)
• the long-time US price-setter - WTI (West Texas Intermediate) has a very aggressive lobby promoting it as the 'world's crude-oil price marker'
• several other countries around the world with strong prima facie cases believe they should be the home of important price-setting markets - hence Dubai Blend and Urals Blend etc.

source: wiki

All to no avail for the would-be usurpers: and as in so many areas of trade and finance, London rules supreme.  Despite its decades of preeminence the WTI is now a tub of guts, suffering over the last few years from even worse logistical problems than Brent.  With its congested inland delivery point, and although still much traded in N.America for essentially historical reasons (e.g. lots of long term contracts are indexed to it), the WTI index has become a parochial anachronism, reflective of not very much at all.  Local traders favour new Gulf Coast indices that are much more representative of world prices, but they don't yet have serious volume / liquidity.  And the rest of the world - well, the RoW don't really have what it takes to establish a global financial market.  Yet.

But it doesn't mean they won't keep trying, and weaknesses in the Brent set-up need to be addressed.  It has evolved successfully in several steps over the years, expanding the underlying physical base from just the Brent complex to Brent+Forties complex, then + Oseberg and + Ecofisk, all still broadly similar North Sea grades.  However they are all in deep decline; and there has to be at least some material physical base underpinning the settlement of derivatives (maybe not in theory, but certainly in practice).

So the legion commercial interests with a stake in the Brent market had better stay ahead of the curve when criticisms are once more leveled at the technical underpinnings.  Based on past successes in this regard they probably will, but complacency could be fatal.

The other weakness which needs addressing isn't technical, it's criminal.  Yes, Brent has been subject of index-rigging allegations: probably less serious than LIBOR, but infinitely more troubling than the UK gas index allegations.  Yet again I find myself advocating public castration for any proven perps.  

Yes folks, Brent is another of those vital markets which make London what it is.  We need it to stay that way.

ND

Shell to buy Cove oil

A bid for 200p odd for Cove from Shell today. Interesting to see the revived interest in North Sea Assets, I hold Xcite Energy, Ithaca and Xtract in my current portfolio. Last year these shares were smashed to pieces as their funding routes for expensive drilling and production dried up. Cove is not a North Sea exploorer but sahres the same profile of being a small Aim company that has been successful in exploring for oil, in their case off Mozambique.

In this year's early bubble, confidence is back and also the major oil producers have not been so successful themselves with their own drilling. Indeed, a pharma-type industry model is rapidly developing where exploration is done by small companies and then the big guns arrive to develop the actual production.

Of course, this has always happened to some extent, but with oil resources rapidly depleting (until shale oil really gets going in a few years), the SuperMajors have struggled with their own exploration - and this is despite huge improvement in seismic scanning and other technologies that de-risk so called 'wild cat' drilling.

Another noted impact is that the AIM companies are back in favour, despite the lack of change in bank funding which caused them to collapase int eh first place. A high price for oil, now above $100 a barrel for an extended period of time, seems to have improved confidence that economic production can take place.

Last year saw the takeover of Encore, now Cove too. Ithaca is subject to a bid. It is a busy year for North Sea M&A and I need to develop a bigger watch list as this period of consolidation is likely to go on for some time.