North Sea tax break plea as oil exploration plummets

government action urged to protect ‘lifeblood’ of energy industry

By Ryan Crighton

Published:

The UK Government has been warned that fresh incentives are needed to kick-start exploration in the North Sea after new figures revealed a huge drop in the number of oil wells being drilled.

Statistics released by the Department of Energy and Climate Change (DECC) yesterday showed oil exploration – the “lifeblood” of the industry – had plunged by more than 75% in the first quarter of 2009.

In the first three months of last year, 13 exploration wells were being drilled by offshore companies. However, this year the number started has slumped to just three, as the oil price dipped as low as $35 a barrel.

Last night, industry body Oil and Gas UK said the credit crunch and the subsequent collapse of the equity markets used to finance most exploration work has crippled investment in new wells.

Its chief executive is now renewing his call for Chancellor Alistair Darling to give tax breaks to firms searching for new wells to free up cash for investment.

Another industry expert fears it could be 2010 before the industry rediscovers its appetite to unearth new supplies.

Exploration – the drilling of new wells in search of oil – tailed off in the second half of 2008, when just seven were being explored in the third and fourth quarters of the year. The drop to just three wells for the first quarter of 2009 represents a fall of 76.9% on the same period last year.

Appraisals – the process of determining how much is in a well that is known to contain oil – have also dropped by 20% compared with last year, from 15 wells in the first quarter of 2008 to 12 so far this year.

Andrew Reid, Aberdeen-based managing director of energy consultancy Douglas-Westwood, warned things were likely to get worse before they got better.

He said: “It was expected that 2009 would be a lot tougher than previous years, but I am surprised that exploration has come down as quickly as it has.

“There is caution in the marketplace which has resulted in activity starting to wind down. There are a number of factors involved. The cost of drilling has skyrocketed and, with the fall in oil price, companies are sitting on their hands.

“Some companies are struggling to find the finance for exploration, while others seem to think it is wise to stop spending right now. It is going to get worse before it gets better because I can’t see any reverse until 2010.”

Oil and Gas UK’s chief executive, Malcolm Webb, said it was crucial for the future of Britain’s energy supply for companies to continue the hunt for new reserves.

He said: “Exploration is the lifeblood of the industry. It is critical for the UK’s future security of energy supply that we continue to find new resources and bring them into production.

“At the start of this year, Oil and Gas UK warned that exploration was at risk of dropping sharply in 2009 and the DECC figures confirm this has indeed been the case.

“Therefore, at the start of the year, Oil and Gas UK proposed that the tax relief due on exploration drilling should be refunded at the time the well is drilled, rather than wait until the producing development is in place.

“This would free up new funds for further exploration and result in higher production and tax revenues for the Treasury. Importantly, the measure could be implemented at no cost to the government.”

The government figures released yesterday also showed that coal production for the first quarter of 2009 rose by 9.8% to 4.1million tonnes. Imports of coal were also up by nearly 13% as high gas prices continue to fuel demand.

Production of crude oil in the first quarter of 2009 has dropped by 2.3% to 18.2million tonnes, according to figures.

Gas production has also dropped 12% compared with the first quarter of last year.