AS the costs of the pandemic to taxpayers mount, oil heavyweights have provided a reminder that the North Sea industry is unlikely to ease the strain on the public finances much.
In its latest report on payments to governments, Royal Dutch Shell underlined just how much it will cost the Government to help firms cover the huge costs that will be involved in decommissioning redundant North Sea assets.
Shell revealed that it was repaid $99 million by the Government last year. The repayment reflected the fact the costs of decommissioning the once mighty Brent field more than offset the profits the company made on its North Sea output.
READ MORE: Scot to chair Shell as oil and gas giant aims to navigate energy transition
Brent entered production in 1978 and its output was a source of valuable tax revenues for years. The field supported hundreds of jobs.
However, three of the four platforms used on the field have now been removed. The last is expected to be gone within a couple of years.
The question of what should be done with the remaining jackets on which the platforms stand has yet to be decided. Shell has suggested it might be less damaging for the environment to leave at least parts of the structures in place.
What is clear from Shell’s filings, however, is that the clean-up work completed to date has resulted in the field being a drain on the public finances for years.
The six reports on payments to governments made in the format Shell introduced in 2015 show the company was repaid a total of $604m in respect of Brent and other Northern North Sea projects.
READ MORE: North Sea leadership change at Shell
Over the six-year period starting in 2015 Shell has been refunded a total of $510m by UK authorities net of the taxes it has paid on profits generated in the country.
By contrast, it has paid a total of $124.5 billion net of refunds to other governments around the world in that period.
Of the years covered by the reports, the only one in which Shell made a net payment to the UK Government was 2017. The filings indicate the payment of $95m that year reflected the impact of the $47bn acquisition of BG in 2015. This brought with it a big North Sea portfolio, which Shell rationalised.
Shell retrenched in the North Sea amid the long downturn that was triggered by the sharp fall in oil prices from 2014 to 2016. It sold off assets deemed non-core and shed hundreds of jobs.
The UK Government introduced generous tax breaks on North Sea investment in response.
READ MORE: North Sea cash engine motoring as Shell cuts Aberdeen jobs
Shell has announced further North Sea job cuts this year as it responds to the challenges posed by the coronavirus crisis and the energy transition.
It is worth remembering that since 2018 Shell has benefited from production from the massive Clair Ridge field West of Shetland, which it developed with BP.
When Clair Ridge was in development both companies made clear just how profitable they expected the field to be. The use of modern technology combined with the scale economies achieved allows them to produce high-margin barrels from Clair. Related investment costs are tax deductible.
With hundreds of North Sea facilities approaching the ends of their useful lives, the implications for tax revenues are sobering.
North Sea industry champions have noted that the upsides for the supply chain include a potential boom in decommissioning work. The expertise developed in this area would be eminently exportable.
Lots of effort is going into developing the decommissioning sector in places such as Dundee.
READ MORE: Dundee decomissioning firms plan floating port for Firth of Forth
It is notable however that the three giant topsides facilities that have been removed from Brent so far have been taken to the Able UK yard on Teesside to be dismantled.
The work will support many jobs in the area for some time.
US giant GE has also chosen Teesside to be home of a plant in which it will make blades for turbines that will be deployed in massive numbers on UK windfarms. The plant is expected to create around 750 jobs directly and to support many more in the supply chain in the area.
Nothing on that scale seems to be in prospect in Scotland.
There was huge disappointment when Fife-based BiFab missed out on work on giant windfarms that are being developed off Scotland.
The Scottish Government came under fire for not providing enough support for BiFab but claimed its hands were tied by EU rules on state aid.
READ MORE: SSE boss defends treatment of Scottish supply chain following windfarm row
On a cheerier note, two overseas heavyweights last week provided evidence that some firms are still prepared to invest in mature North Sea fields.
Ithaca Energy and Dana Petroleum agreed to invest around £400 million in total in a project to boost recovery rates from the Captain field 90 miles north east of Aberdeen.
The two firms hope to squeeze an extra 40 million barrels out of Captain, and to extend the life of a field that has been in production since 1997.
The investment signals continued belief in the long-term potential of the North Sea on the part of both. Korea National Oil Corporation acquired Dana for £1.9bn in 2010.
Israel’s Delek bought Ithaca in a £1bn deal in 2017. It then backed Ithaca to buy a $2bn North Sea portoflio from Chevron.
READ MORE: Israeli oil firm underlines faith in North Sea growth potential after $2bn deal
The decision to go ahead with the work should trigger a much-needed boost to the supply chain in the North Sea. The Captain project will involve Ithaca and Dana drilling wells and developing subsea and topsides facilities.
Firms that operate North Sea fields slashed spending in response to the plunge in oil and gas prices last year. Companies that help to develop or upgrade facilities have seen revenues come under great pressure.
Oil prices have rallied since November amid hopes that coronavirus vaccines will support a strong economic recovery.
However, while there has been a flurry of mergers and acquisitions activity, there have been few signs that other firms are ready to follow Ithaca and Dana’s lead in sanctioning projects.
READ MORE: Why are North Sea oil and gas assets suddenly in demand among overseas investors?
Even if some do, the fallout from the pandemic combined with the breaks introduced in the last downturn mean the taxes paid by many firms will probably fall.
In the company’s accounts for 2020, which it released earlier this month, Ithaca recorded a book loss of $560m after cutting the valuation of its assets by around $680m.
The company still generated plenty of cash from its North Sea operations. Delek has described it as a growth engine.
However, the taxpayer may face a long wait to share in that success.
In the 2020 accounts Ithaca notes it has UK tax losses of $1.8bn that may be carried forward indefinitely. The group also had $65m capital allowances to carry forward at December 31.
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