Not Even Osborne’s £1bn Fossil Fuel Tax Break Can Convince Some Oil Giants to Stay in the North Sea

Two oil majors are looking to pull out of their North Sea operations in the face of continued low oil prices it was revealed over the weekend.

Both ConocoPhillips and Shell are looking to either close down or sell assets in what is being described as the biggest sector meltdown since the 1980s when oil prices dropped to $10 per barrel.

And this is despite the fossil fuel industry being handed a generous £1 billion in tax breaks by Chancellor George Osborne just two weeks ago.

In his 2016 budget announcement, Osborne promised to cut a supplementary tax charge on oil companies from 20 to 10 percent and scrap the 35 percent petroleum revenue tax altogether (this had taxed profits for older oil and gas fields, such as those in the North Sea).  

The budget was instantly labelled a hypocrisy however, for its promise to put future generations first while failing to seriously tackle climate change.

As expected, oil company share prices rose in the wake of this announcement, but it appears that this still wasn’t enough to convince some to stay.

Describing the UK North Sea as “old and mature” Shell (whose share price went up nearly 10 percent following the budget announcement) is now looking for buyers for its North Sea operations. This is part of a wider company pledge to divest $30bn (£21.5bn) of its global assets following its £35bn takeover of rival BG.

At the same time, American oil company ConocoPhilips is reported to be looking to shut down one of the North Sea’s biggest gas pipeline systems, the Lincolnshire Offshore Gas Gathering System, as well as its Theddlethrope gas terminal within the next couple of years.

The move would deal a significant blow to the area – at least ten gas fields rely on the pipeline system. Should the system be closed, these fields could also be forced to shut down permanently some experts warn.

With harsh conditions and ageing platforms, the cost of production in the North Sea is among the highest in the world.

In an effort to support the sector, last year the government adopted the Infrastructure Act which requires the government to “maximise extraction” of oil and gas from the UK continental shelf – a law inspired by Sir Ian Wood, the billionaire owner of the Wood Group, which provides services to the oil and gas industry.

This was done before the significant drop in oil prices, and it recognised that if the government wants to increase extraction companies must search for smaller pockets of reserves deeper under the sea which are harder and more costly to reach.

So now, with oil prices much lower than when the policy was first being developed two years ago, the government is pouring even more money and resources into fulfilling a goal which is proving increasingly challenging to meet.

Not only that, but by investing in, and incentivising, fossil fuel extraction, the government is helping lock in further carbon emissions right at the moment when countries around the world, including the UK, have pledged to do the very opposite in an effort to avoid catastrophic climate change.

In order to do all of this, the Oil and Gas Authority (OGA) was created to regulate the offshore oil and gas industry. The OGA has now announced a £500,000 competition for future licenses to “stimulate further offshore oil and gas exploration activity” as well as £20m in funding for a second round of seismic testing this year to search for further reserves.

But while the industry in the area may have survived low oil prices in the 1980s, this time it’s different. As Sir Ian Wood described to the Times: “The difference this time is that the North Sea no longer holds the same bounty as it did then… [It is] a very mature basin.”

“There has been quite a significant reduction in costs, but right now we are not competitive at all,” Sir Ian told the Times. “Even at $100 [oil], our industry was not doing well.”

Sir Ian estimates that about 150 jobs are lost each day in the sector. And according to natural resources consultancy Wood Mackenzie, about a third of the UK’s 330 oil fields in the North Sea may close down over the next five years – even if prices rebound to $85 a barrel.

“If we are not careful we will recover only ten billion barrels of the 20 billion that are left [in UK waters],” Sir Ian lamented, calling for even greater government support to get every last drop of oil out of ground.

Comparing the government’s support for this rapidly ageing fossil fuel industry with its rhetoric on climate change – such as its recent pledge to adopt a zero carbon emissions target based on the Paris climate deal – it becomes abundantly clear that the UK’s climate policy and its energy policy is becoming increasingly disjointed.

It begs the question: when will the government start looking at the two issues as a whole and truly invest in a way that benefits future generations?

Photo: Dave Connor via Flickr