Kiran Stacey North Sea oil and gas confidence slumps (but it’s still positive)

North Sea oil rigOil and gas operators in the North Sea have ramped up their lobbying efforts to persuade the government to reverse, or at least dilute, its tax hike on those companies to pay for the cut in fuel duty.

Early on Wednesday Oil & Gas UK, the industry’s lobby group, produced figures showing confidence among producers in the area had slumped.

On a scale from 1 to 100, with 50 being neutral, overall confidence dropped 12 points to 51. For E&P companies, the fall was particularly pronounced, with a 25 points drop to 46, the lowest ever for the sector. Confidence among major producers, meanwhile, was 21 points lower at 39.

Later, Oil & Gas UK’s representatives testified to the energy and climate change parliamentary committee on the issue. Malcolm Webb, the group’s CEO said afterwards:

This increasingly mature sector needs careful handling. It cannot take shocks such as the recent tax hit introduced by the Chancellor last month. These reduce the UK’s relative attractiveness for investors who will now look to rival opportunities overseas where their capital will earn better returns.

The industry might yet succeed in getting the government to allow gas operators some leeway on the tax, with gas currently trading at about half the price of oil. Centrica’s threat not to resume output on the Morecambe Bay field will have helped push this case.

But oil producers will find it difficult to persuade the chancellor. First of all, we should notice that despite the tax hike, sentiment still remains above 50, so still positive, if only just.

Secondly, while gas producers may be suffering from low gas prices, oil companies are enjoying the fruits of a huge rise in oil prices. Statoil, a major North Sea producer, reported a 44 per cent jump in profits on Wednesday, which will hardly have helped the cause to quash the tax rise.

Finally, North Sea assets are largely mature, if not declining. While it is true that investors are shying away in the wake of the Budget, this was likely to happen (albeit over a longer period) anyway. The Treasury may have simply made the decision that it is worth milking North Sea oil and gas while it is still there.

The question is not really whether the tax hike is a good policy but, with the effect of oil price rises essentially wiping out the benefit felt from the cut in fuel tax duty, is it worth it?