U.K. North Sea Spending Cut in Half, Deterred by Oil Price, Tax

U.K. North Sea investment will drop by more than half as tumbling oil prices and high taxation force energy producers to cut costs, according to an industry report.

Planned spending on new projects is seen shrinking to 3.5 billion pounds ($5.4 billion) this year from 8.5 billion pounds in 2014, according to the report by Oil & Gas UK. Investments may sink further to 2.5 billion pounds by 2018, the lobby said.

“There is very little fresh investment,” Malcolm Webb, chief executive officer of the group that represents about 500 companies, said in a statement. It “paints a bleak picture.”

Operations in the region, from companies including BP Plc and Total SA, are caught between the rising cost of exploiting maturing resources and oil prices that fell by half since June. Britain was already suffering one of the steepest declines in output of any major producer since supply peaked 15 years ago, with the nation’s production collapsing by about two-thirds.

The basin saw a negative cash flow of 5.3 billion pounds in 2014, the worst since the 1970s, as operating costs climbed to 9.6 billion pounds and revenues fell to 24 billion pounds, the lowest since 1998, according to the industry report.

Only 14 wells were drilled, compared with an expected 25, Oil & Gas UK said. This year, eight to 13 wells may be sunk as explorers struggle to raise funds amid low prices, it said.

The lobby group has been leading demands that the U.K. cut taxation on companies after Chancellor of the Exchequer George Osborne, seeking to boost government income as part of his rush to curb the country’s deficit, imposed profit charges in 2011.

Tax Reductions

The government announced some tax reductions, effective from this year, but they fell short of the lobby’s demands. The so-called supplementary tax was reduced to 30 percent from 32 percent compared with the 20 percent that some had sought.

Without further incentives, possibly at Osborne’s budget next month, weak investment in the North Sea is set to persist.

About 6.3 billion barrels of oil equivalent are now being developed or have been sanctioned, meaning a final investment decision has been issued. While there are a further 3.7 billion barrels of possible investment opportunities, energy companies suggested at the end of last year that less than 2 billion of those would probably be developed, according to Oil & Gas UK.

“The current rate of exploration drilling is the lowest since 1965 and urgent action is required to stimulate activity in this area and generate future development,” the lobby said.

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