PESGB March 2005
Beware the Treasury and the old enemy!
The oil price continues to be robust, major company profits are increasing and investment in the UK North Sea is set to increase this year. All is well in the E & P business. Not! I see the clamour is increasing to apply a windfall tax on companies with North Sea production due to the excess profits being reported as a result of continued high oil price. The suggestion is that this windfall tax could then be used to subsidise the cost of energy for the poorer members of society. This all sounds laudable. The real problem is that it is a very blunt instrument and would take potential investment funds away from an ever-maturing basin. This money would be better spent on incremental investment in currently producing fields, developing reserves that are marginal at lower oil prices and exploring for new reserves for future developments.
Cumulative oil and gas production peaked in the UK in 2001-2 at about 4.7 million barrels a day of oil equivalent. The UK is likely to be a net importer of gas in the near future. Projections published by PILOT (the joint government and industry task force) predict a fairly sharp decline. There is likely to be a shortfall in the 2010 target of 3 million barrels a day of oil equivalent. This situation has security of supply implications and will add significantly to the balance of payments pressure. All of this suggests that government should be stimulating incremental investment at all points of the hydrocarbon value chain not listening to the calls to “tax the fat cats” that we are beginning to hear.
The 2004 DTI survey on exploration and appraisal drilling for the next two years is very encouraging. The projection is that we will see 35 plus exploration wells drilled in 2005, this compares to the meagre level of 16 at the nadir in 1999. There are seven E & A wells being drilled as I write this article. There are signs that activity will increase in the North Sea and the Atlantic Margin. The recent ChevronTexaco discovery on the Atlantic Margin is likely to stimulate further interest in exploration in an area that has seen a mixed bag of results since the “heady days” following the Foinaven and Schiehallion discoveries in the early nineties. The appropriate application of technology is very important as exploration activity increases. Nick Loizou of the DTI has elegantly demonstrated that an over dependency on AVO analysis led to a relatively unsuccessful exploration campaign on the Atlantic Margin during the late nineties and into the early days of this decade. Anybody present at the Bath Conference in 2001 will remember the hype and expectation built around the “Assynt” exploration well which was dubbed a racing certainty by the operator before the drill bit was anywhere near the reservoir. A salutary lesson for us all! Understanding risk and uncertainty is necessary as exploration is hurt by a plethora of dry holes. There is much truth in the old adage that “success breeds success”.
I am writing this article at a time that is exciting for rugby fans across the country. The Six Nations tournament starts next weekend with England travelling to the Millennium stadium in Cardiff. I do not intend to tempt fate by predicting the result. We draw our membership from many parts of the world so I hope that our members from all six nations have an enjoyable few weeks. As for me I am off to the Stoop on Saturday to see Harlequins beat Gloucester and climb off the bottom of the Zurich premiership and then watch England beat Wales. Well I can dream can’t I?!