When UK finance minister George Osborne presented his spending review this week there was a clear message: difficult decisions would be taken, so the country could live within its means.
It’s a well-rehearsed line from a government with an ideological leaning against what it deems unnecessary public spending. It is very keen on letting people know that they should be able to stand on their own two feet, and the language it uses — “strivers, not shirkers”, “a lower welfare, higher wage economy” — reflects this.
But this certainty evaporates when it comes to the oil and gas sector. When it introduced industry-boosting tax breaks a year ago, the government did so on the assumption that the oil price would average $83.10/bl in 2015. There are few people willing to put that as the top end of the range for next year. The fall in oil prices means the government has backed itself into a corner.
The tax take from North Sea oil and gas has been negative in five of the first 10 months of this year, only one month fewer than in all of the previous eight years combined. So imbalanced has this been that £600mn ($900mn) more has gone out in tax breaks than has come in.
And to what end? The Office for Budget Responsibility (OBR), an independent fiscal regulator, said 2014-15 was the last year that UK oil and gas receipts would make a statistically meaningful contribution to GDP — at a mere 0.1pc of the total. It forecasts a zero contribution in each year out to 2020-21, with actual government revenues from royalties, corporation and sales taxes falling to below £1bn/yr. The OBR forecasts revenues from the North Sea to be down by 94pc this year.
Although the tax breaks were welcomed — and went some way to allowing development of the 250mn-300mn bl of oil equivalent (boe) Culzean gas and condensate discovery — and costs are falling, the North Sea remains one of the most expensive and most challenging places to do business. Companies operating there are mostly miserable.
Increased operating efficiency has contributed to a production rise this year, and the redevelopment of mature discoveries will allow output to remain fairly constant over the next five years. This will take the industry through to the start-up of Johan Sverdrup, the 1.7bn-3bn boe field that stands out in terms of its size and its rarity – consultancy Rystad Energy says it accounts for 35pc of all discovered resources in the North Sea over the last 10 years.
But Sverdrup is Norwegian, and came about thanks to a Norwegian initiative of 10 years ago that essentially made offshore exploration a no-risk game. Thanks to this foresight, the Norwegian economy is proving resilient to the pressure of lower prices.
This is what made Oil and Gas UK’s reaction to the Autumn Statement so disappointing — instead of calling for moves that would enable a Johan Sverdrup to be found in the UK North Sea, it called for “revisiting the current headline tax rate” — the one that has seen £600mn more leave public coffers than enter them this year alone. The North Sea is, in effect, on subsidised life-support and may well be so until someone decides to pull the plug.