January 13, 2012 / 7:03 AM / in 6 years

Exclusive - UK oil and gas decline to halt as investment booms

<p>A ship is moored in Aberdeen docks in Aberdeen, Scotland, in this September 25, 2009 file photo.Russell Cheyne/Files</p>

LONDON (Reuters) - British oil and gas tax revenues could rise by billions of pounds this year as high oil prices boost earnings and tempt operators into opening new fields after a decade of sharp declines, industry data and Reuters research showed.

The past two years of investment have set the stage for a landmark shift in the North Sea, following exceptionally dismal data in 2011 when oil and gas production in the third quarter slumped at the fastest rate since records began in the mid-1990s, research by consultancy Wood Mackenzie suggested.

Oil and gas investment in Britain is set to hit an all-time high this year, adding new jobs and potentially more than 5 billion pounds in tax revenue to Britain's strained budget and labour market.

British oil and gas production has fallen at an annual average of 4.13 percent and 6.16 percent, respectively, since 2005, according to government figures.

A halt in falling output alone would give the Treasury almost 2 billion pounds more in gross production revenues in 2012 than it did in 2010, Reuters research showed. Calculations were based on 2010 oil and gas prices and an industry average tax rate of 68 percent.

But higher oil and gas prices this year could lift tax revenues by 5.5 billion pounds compared with 2010, the latest year for which data is available, although that is before companies deduct capital and operating costs and some other rebates.

"As of 2012 we expect production declines to halt for liquids (including crude oil) and gas, and we expect that to continue for a few years until the decline starts again," Lindsay Wexelstein, an analyst at energy consultancy Wood Mac, told Reuters.

According to industry body Oil & Gas UK's 2011 Economic Report, the UK Treasury expects total tax revenue from the oil and gas industry to exceed 13 billion pounds in fiscal 2011-2012. The forecast halt in production declines is not factored into these calculations.

Wexelstein predicted a slight increase in gas production but said oil output would most probably remain stable.

Wood Mac also said that Norwegian oil and gas exploration is set to increase in 2012. Norway expects to publish its offshore oil and gas outlook on Monday.

Britain's crude oil production amounted to around 58 million tonnes in 2010, according to government data, and BP figures showed the average price for Brent crude in 2010 was $80.33 per barrel.

This puts the total value of UK oil output at over 22 billion pounds. At current Brent futures prices for 2012 of almost $100 a barrel, the same production would be worth over 27.5 billion pounds.

Government data showed that UK gas production was 54.53 billion cubic metres (bcm) in 2010, and the average spot price for gas was 42.45 pence per therm, according to Reuters data.

This put Britain's market value of gas production at 8.56 billion pounds.

At the same production levels and current gas prices of over 56 pence per therm, the value rises to 11.45 billion pounds.

Boom Only Short-Lived

Analysts said the main downside risk for government revenues is that a renewed recession could pull down energy prices.

They also said the halt in declining North Sea production would only be for a few years.

North Sea oil and gas output passed its peak at the start of the last decade as the larger and easier-to-tap deposits were pumped out. That peak remains out of reach to this day, Wexelstein said.

With oil prices rebounding to over $100 a barrel, energy explorers ramped up investment in development programs from 2010 after years of low prices that had put new projects on ice.

"There is still significant appetite for investment on the UKCS," according to David Valente, oil and gas analyst at Deloitte Petroleum Services.

"During 2011, there was an increase in the number of field development approvals granted by the UK Government when compared to 2009 and 2010," he said.

BP, Total, RWE Dea, BG Group, and GDF Suez have spearheaded a recovery in output after spending billions of pounds developing seven of the biggest discoveries in the UK continental shelf in recent years.

Vast untapped reserves due to enter production in West of Shetlands, Central North Sea and Southern Gas Basin in British waters will power the revival, Wood Mac said.

The improved investment outlook appears to challenge oil and gas company officials who said last year's surprise hike in the tax on production would thwart investment and lead to job losses.

"Although the government's decision to alter the UK tax regime during 2011 was met with significant opposition from within the industry, due to the lead time associated with planning of exploration and development activities, we are yet to see the impact of this on the UKCS," Valente said.

The unexpected rise in North Sea oil and gas exploration also means the sector will take on extra staff, energy recruitment company NES Global Talent said, adding that demand for engineers should rise within three to six months.

"During the recession, lots of projects didn't make it past the financial investment decision stage, but many were sanctioned in 2011, and as a result of this we can expect an increase in demand for construction and commissioning roles," Simon Coton, NES Global Talent's managing director, said.

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