Trade association UK Oil & Gas has warned that production in the UK Continental Shelf is "at a tipping point" because of record low oil prices, and faces a "day of reckoning" unless Chancellor George Osborne introduces a friendlier fiscal regime in next week's Autumn Statement.
Mike Tholen, the industry group's economic and commercial director, said current tax rates of between 62p and 81p in the pound were "unbearable", even when the oil price was above $100 per barrel. But with the price dropping to $70 on Friday evening, there was "real apprehension" that investment would dry up and that the North Sea was in danger of becoming a "centre of decommissioning rather than a centre of production".
Tholen said: "We are very much around a tipping point, and I think facing a day of reckoning. If we don't see swift action from the Chancellor to make a substantial change to the tax burden, we will see a lot of things start to go wrong for the industry, and we will end up in a situation where we will radically shorten the future of the industry in the UK."
The Chancellor, who delivers the final Autumn Statement of the current Parliament on Wednesday, has consulted over the summer with UK Oil & Gas and others over the fiscal regime in the UK Continental Shelf (UKCS), as part of the programme of work of fiscal consultation recommended in May's Wood Review on prolonging the value of UK's diminishing assets in the North Sea.
UK Oil & Gas has been lobbying for the removal of the Coalition's controversial 12% increase in the tax regime which was introduced in 2011.
Tholen said: "We all like lower fuel costs. But clearly the challenge is that the UKCS was never an easy or cheap basin. It costs more to do things and the opportunities are smaller, the infrastructure is a lot creakier. That has to be recognised.
"In 2008, when oil was $130 a barrel, Gordon Brown [then prime minister] was pressuring us to invest more, but even then at those costs the opportunities we were looking to pursue were difficult to secure investment. Even with a tax rate of 50p in the pound, much of the North Sea struggles.
"When Oil & Gas UK published an investment survey for the year when oil prices were much higher, we saw investment falling off in 2017-18 to about half of what we are seeing now, and that was with prices of $100-plus.
"There are fields that were already struggling to get investment in west of Shetland. It's a big question if they are going to go ahead at the current costs, at the current tax rates."
Brent crude touched a new four-year low of $71.12 a barrel early on Friday, before recovering to trade around $73 mid-afternoon - but it slid again in early evening trade. The price had already dropped more than $5 a barrel the previous day after oil group Opec announced no change to its production plans following a meeting in Vienna.
Osborne is believed to be under pressure to introduce a package of measures to sustain the industry, led by a reduction in the headline tax rate reversing the 12% increase.
Other possibilities, according to analysts, include tax breaks for companies intending to invest in the so-called ultra high-pressure, high-temperature fields in the central North Sea, and a "tidying up" of differential field rates seen as an off-putting complication by potential investors.
Tholen said: "More generally we need the UK Government to offer a road map, a narrative of where the tax regime should head over the next years."
In his "UKCS maximising recovery" review commissioned by Energy Secretary Ed Davey and published in July, Aberdeen oil and gas magnate Sir Ian Wood proposed a "knowledgeable and better informed regulator, working closely with HM Treasury, providing advice to inform fiscal decisions to meet the new challenges arising from maturity, and the opportunities from frontier areas and new plays".
Oil prices at around $72 a barrel diverge substantially from the Scottish Government's pre-referendum predictions, including those in the Oil & Gas Bulletin of March 2013, which forecast a steady rise from the then price of over $113.
In a statement, the then first minister Alex Salmond predicted a "second oil boom" for the UKCS, saying: "Even with a cautious estimate of prices remaining at $113 a barrel being used, it's clear that Scottish oil and gas could generate more revenues than has previously been assumed."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article