Britain’s North Sea oil and gas industry was a net drain on the UK’s public finances for the first time last year, as the slump in the oil price hit company profits.
The sector received £396m, net of tax payments, from the government in 2016 compared with a contribution to the exchequer of £381m the previous year, according to
analysis by energy specialist Carbon Brief. As recently as 2011, the industry’s contribution to the government’s coffers amounted to more than £10bn.
“The sector is no longer the cash cow chancellors have come to expect over the past several decades,” said Carbon Brief’s policy editor, Simon Evans.
The oil price, which was as high at $114 (£91) a barrel in 2014, fell to below $30 last year as a supply glut coincided with with falling demand as the global economy stuttered. Attempts by oil producers at Opec to curtail output have only had limited success, not helped by an upturn in US shale production, and Brent crude has only recovered to around $53.
Evans said: “If [companies] are operating at a loss in the current year, they can claim a rebate on tax paid in previous years. This latter factor is likely to have been quite significant, given oil prices crashed to $30 by early 2016, only rising towards $50 by later in the year. [At these levels] they were probably operating at a loss and reclaiming tax.”
Firms can also claim rebates on the cost of decommissioning rigs, pipelines and other infrastructure as some of the largest North Sea fields come to the end of their lives. Although these are probably not significant yet, with
decommissioning of Brent only beginning this year, the Oil and Gas Authority has estimated that the clean-up could cost £47bn between now and 2050. Another study said the cost could be as high as £75bn.
In total, the oil and gas sector has contributed about £190bn in tax revenues since the 1960s, not adjusted for inflation. But the future outlook is uncertain, given the costs of decommissioning and the fluctuations in the oil price.
In March 2016 the Office for Budget Responsibility forecast that the sector would receive a net payment of £1bn a year for the next five years from UK taxpayers. However with the recovery in oil prices, last month, the OBR predicted the sector would in fact contribute £4.5bn over the five-year period.
In a separate analysis of
government figures, Carbon Brief said BP, ExxonMobil and Shell were the largest recipients of taxpayer funds to help cover the cost of decommissioning old oil and gas fields.
The top five recipients (BP, Shell, ExxonMobil, Talisman Sinopec and Hess) were paid a net total of more than £1.1bn across 2014 and 2015, according to Carbon Brief.