North Sea oil supply slumps as tax grab bites deep By FRANK URQUHART Published on Tuesday 28 February 2012 00:00 NORTH Sea oil production collapsed by a record 18 per cent last year - the biggest fall since black gold started flowing four decades ago - as the Chancellor's controversial tax hike shook investor confidence. The slump was caused mainly by a combination of platform shutdowns for essential maintenance on ageing installations and a low number of discoveries being brought on stream. But prospecting for new oil and gas reserves was also hit by a 50 per cent reduction in exploration drilling as George Osborne's oil tax-grab hit investment plans, according to the latest activity survey by Oil & Gas UK. The pan-industry trade body's report, published today, reveals that only a small number of large projects are continuing to drive UK offshore oil and gas investment in the short term. But, with a potential 24 billion barrels of oil still to be extracted, industry leaders say they have identified an additional £20 billion of investment - currently "fiscally stranded" by the tax regime - which could be unlocked as a result of targeted changes in the tax system affecting oil and gas companies. And last night the SNP called for the Scottish Parliament to be given powers to set the fiscal regime for the industry north of the Border to ensure North Sea production can be maximised. The report reveals that: UK oil and gas production fell by 18 per cent - three times the previous rate of decline - to 1.8 million barrels of oil equivalent per day last year; Gas production alone fell by 20 per cent - the largest year-on-year fall ever recorded; Oil companies were forced to spend £500 million ensuring the integrity of ageing platforms; And the number of new reserves brought on-stream last year was the lowest on record. Malcolm Webb, chief executive of Oil & Gas UK, said: "It would be a mistake to take the current major project activity as a sign of long-term confidence across the industry. This year and next will see high investment on a few large projects which were commercially committed before last year's Budget. However, 2011 production saw a record drop, exploration halve and business confidence remain sluggish, despite an average oil price of $111 per barrel. But by taking the right steps in the 2012 Budget - at no additional cost to the Exchequer - the Chancellor could boost UK production with benefits for UK investment, jobs, the balance of trade and energy security. He stressed that the industry did not need "cash handouts," but added: "All that we need is certainty around decommissioning relief - bankable assurance from the government that it will live by what is in the law - and secondly, some further field allowances which are only payable out of incremental production. What the industry is looking for now is a very clear signal from the government. We have had lot of good collaborative work with the government over the last 12 months, but we want to see some action now. It is becoming very clear that in order to stand still - let alone make progress in this basin - you have to keep running faster all the time. This is a mature basin with a range of challenges ahead of it, but that doesn't mean to say it's a basin without a huge potential still remaining. Twenty-four billion barrels of oil and gas is a very, very significant prize to play for. But the risk is that, if we carry on the way we are doing, we won't get them all. A year ago, industry leaders warned that companies could be forced to cancel or postpone major investment plans - putting thousands of jobs at risk - as a result of the Chancellor's controversial decision to raise an extra £2bn a year from North Sea oil companies every year until 2016 to help fund the fuel duty cut. Mr Webb said: "Although headline investment has tripled over the last decade, the amount of oil and gas recovered per pound invested has fallen by two-thirds over the same period. This effectively leaves us fighting hard to stand still. UK investment must be seen in light of this acute decline in capital efficiency and viewed in a global context - the UK attracts less than 4 per cent of global oil investment. The report states that in recent years production has been falling by an average of 6 per cent a year and that it had been expected the rate of decline would slow down last year. "However, last year's 18 per cent decline was the biggest on record," the report said. This was caused by a significant number of unplanned production stoppages and made worse because only a few small fields were brought on-stream, replacing less than 5 per cent of annual production. This reflects the slowdown in new field developments experienced in the aftermath of the tax increase of 2006. It also warned that the fall in production had "significant consequences," driving the cost of producing each barrel up by 25 per cent last year. The report said: "Companies also spent £500m on action to ensure long-term asset integrity. That additional unplanned capital spend drove total investment in 2011 to the top end of expectations, at around £8.5bn. Worryingly, only 15 exploration wells were drilled in 2011 (50 per cent of the 2010 activity) making it the lowest year for exploration since the mid-1960s. The report claims that, had production not collapsed in 2011, the UK's GDP would have been at least 0.2 per cent higher, and North Sea tax receipts for the Treasury would have been £2.3bn higher. Scottish energy minister Fergus Ewing backed the industry calls for tax incentives. He said: "With more than half of the value of North Sea oil and gas reserves yet to be extracted, this report underlines the need for continued and sustained investment in the North Seas in order to maximise recovery of oil and gas reserves. It is in everyone's interests for the oil taxation system to be incentivising, and the Chancellor must ensure that next month's Budget delivers long-term stability, certainty and confidence across the industry. But Maureen Watt, the SNP MSP for Aberdeen South and North Kincardine, called for Scottish control of a devolved North Sea tax regime. She said: "Scotland needs the full powers to allow us to tailor the North Sea tax and regulatory framework that will ensure extraction levels are maximised and the industry supported." A Treasury spokesman said: "The government seeks to deliver a tax regime that encourages investment in the North Sea, while also making a fair contribution to the public finances."