Saturday, May 28, 2011

U.K. North Sea Oil Companies "Going Galt"

UK Independent -- "North Sea oil production has slowed to its lowest level since records began 15 years ago following the Chancellor of the Exchequer's recent tax raid on the industry. An update from the U.K. Department of Energy yesterday showed the biggest fall in oil production since quarterly records started in 1995. Gas production fell 17.6 per cent from a year ago.

The slowdown follows the Chancellor's controversial Budget decision to increase the supplementary tax on North Sea Oil production to 32 per cent from 20 per cent to pay for a cut in petrol duty. The Chancellor's decision drew an industry-wide outcry and claims that mature fields would be closed.

An Oil and Gas UK survey warned that a quarter of 240 potential projects in the North Sea were less likely to go ahead after the tax increase."

MP: Let this be a lesson to the Senate Democrats who are proposing to burden (punish?) America's five biggest oil companies with $21 billion in additional income taxes over the next decade.

12 Comments:

At 5/28/2011 7:00 PM, Blogger Methinks said...

They've purposely slowed production, you say? Time to send the CFTC after those greedy oil companies to investigate price manipulation! If these companies are out of reach of the bureaucrats at the CFTC, perhaps they can sacrifice several oil speculators at the alter of Lord Government to ward of its wrath.

Commodity prices cannot go up and stocks, bonds and houses cannot go down. So sayeth the government. And so it shall be....or else.

 
At 5/28/2011 8:06 PM, Blogger Rufus II said...

The oil companies don't cut their cash flow because someone jacks up the taxes. If they did there would never be any oil produced.

The North Sea is in serious decline. has been for several years.

 
At 5/28/2011 8:07 PM, Blogger Rufus II said...

Think, Cantarell.

 
At 5/29/2011 2:10 PM, Blogger morganovich said...

rufus-

well, first off, higher taxes DO cut cashflow by definition, so your argument as written is pure nonsense and illogic.

second, the idea that reducing cash flow would ELIMINATE oil production is also ridiculous. reduce is not the same as eliminate.

but higher taxes DO reduce oil production.

less profit = less reinvestment into exploration, drilling, etc as well as higher prices for consumers. that reduces everyone's welfare (and reduces oil production).

your argument doesn't even make the rudiments of sense.

not only is each proposition clearly false, but they also have no relation to one another.

 
At 5/29/2011 2:15 PM, Blogger Rufus II said...

Morgan, it takes years, and hundreds of millions of Dollars to bring an Offshore Oil Well online. Once it's online, and pumping out Millions in "Cashflow," you don't shut it down just because someone raised the taxes on you.

To think Otherwise is "Illogical."

 
At 5/29/2011 6:11 PM, Blogger Craig said...

The oil companies don't cut their cash flow because someone jacks up the taxes.

What cereal box did you get your economics education from? If the tax increase (in this case over 50%) reduces profits below your desired ROI, you axe the operation. That's not really a hard concept to understand -- or to agree with.

 
At 5/29/2011 6:15 PM, Blogger Methinks said...

Don't be silly, Rufus. Marginal development wells are put on hold and production can be slowed even if wells aren't capped.

 
At 5/29/2011 6:31 PM, Blogger Methinks said...

Craig,

I don't disagree with your fundamental point, but the economics of upstream oil operations are a little more complicated than that. Capped wells can't necessarily be brought back to full production (some can and some can't) - although, oil companies do cap wells when cash flow gets so low that even the probability of not being able to bring the well back on is not enough of a deterrent to capping. Despite falling cash flow, they will continue to operate wells until that point.

It's a much easier decision to hold off on development wells. Exploration must continue.

Upstream operations are different from most other businesses because the asset of the company is the hydro carbon reserves. Once brought on production, wells produce 24/7, but exploration for new assets does not. The CEO of an upstream company (or the manager of an upstream operation within an integrated company) has the strange experience common to all depleting asset companies of coming to work in the morning to a company that is smaller than when he left the night before. IMO, it's really a hellish business.

 
At 5/29/2011 8:06 PM, Blogger Ron H. said...

"The CEO of an upstream company (or the manager of an upstream operation within an integrated company) has the strange experience common to all depleting asset companies of coming to work in the morning to a company that is smaller than when he left the night before. IMO, it's really a hellish business."

Of course to compensate for that thankless part of the job, he or she gets frequent trips to Washington to speak with important politicians whenever business starts looking too good.

 
At 5/30/2011 11:57 AM, Blogger morganovich said...

"Once it's online, and pumping out Millions in "Cashflow," you don't shut it down just because someone raised the taxes on you."

as ever rufus, you seem to be missing the point.

if they are taxed more, they have less money to invest in the next well or to keep the existing one flowing well.

look at what has happened in mexico and venezeula for a prime example of what happens when you fail to reinvest in your oil fields.

your whole argument is self defeating. sure, you might keep running a well down, but reducing the return on investment through taxation will always affect future investment decisions and cause fewer wells to be drilled.

you seem to have a very flawed view of how a business works.

 
At 5/30/2011 12:04 PM, Blogger morganovich said...

""Once it's online, and pumping out Millions in "Cashflow," you don't shut it down just because someone raised the taxes on you."

this is also not true in all cases.

let's yourprofit per barrel of oil is $20 and the price of oil is $100. then, a 25% tax is levied on every barrel of oil. (realize that many oil taxes are based on production and sales, not income)

now your profit per barrel is -$5.

you would indeed stop production.

your argument is just more flawed logic.

 
At 5/31/2011 11:27 AM, Blogger Unknown Blogger said...

Economics aside, isn't it possible that ending drilling in the North Sea is seen as a desirable outcome of these tax increases? If the Democrats want American oil production dramatically slowed or completely eliminated (so that there is more need for "green" energy sources NOW!) wouldn't raising taxes to the point that its no longer profitable for oil companies to drill be a reasonable strategy? Then its the "greedy" oil companies that have "chosen" to stop production. Its not the government's fault!

 

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