Drill baby drill?

 

            We hear today that the Morecambe Bay gas field is being closed for four weeks for maintenance. The field accounts for 6% of UK gas production. We also learn that Morecambe South, part of the the field, is now taxed at 81% and may not re-open, owing to the high taxation.

           It is further proof that imposing higher tax rates may lead to less revenue than the Treasury expects. We need the gas. We have just lived through a couple of very cold winters, and even this spring face cold easterly winds which can bring frosts as late as May. If the government is serious about its wish to switch more of our economic activity into manufacturing, the UK wil need energy to fuel the factories and fire the furnaces.

             The combination of the carbon tax and the higher oil and gas taxes represent an obstacle to more manufacturing which the government should review. If part of Morecambe fails to re-open, we will simply import more gas from elsewhere, adding to the pressures on world supplies of hydrocarbon.

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34 Comments

  1. Posted May 2, 2011 at 7:26 am | Permalink

    If you want things to happen you need to make sure it is in business’s and peoples’s general interest do do so. Not just say it or demand it. Taxation at high levels distorts peoples actions hugely costing a fortune and makes them do things not in the interest of the country.

    Just fire some of the people doing nothing useful (or often worse) instead and lower taxes. There is no shortage of these people all over government. If you cannot decide just fire one in two at random and you will hit enough of them to improve thing dramatically.

    • Posted May 2, 2011 at 7:51 am | Permalink

      Cameron pledged to make the next ten years “the most entrepreneurial and dynamic decade in our history”.

      Do you think John that he is he going to start this before he looses the next election?

      The abolition of the absurd HIP pack (and that in part only) is not likely to be enough. Particularly when all his other actions have been so clearly in the wrong direction. In particularly the hugely damaging retirement at 65 issue and absurd energy policy.

      It also renders any future pledges he makes, on any issue, totally valueless.

    • Posted May 2, 2011 at 11:01 am | Permalink

      “If you cannot decide just fire one in two at random and you will hit enough of them to improve thing dramatically”

      Both hilarious and a brilliant idea. This should be government policy today.

  2. Posted May 2, 2011 at 8:12 am | Permalink

    The bit that bothers me is, how did the tax get to be 81%? Is there an ideological hatred of natural gas in the coalition? Do they just hate oil companies? Was this a Lib Dem must have in the coalition document? Was it “this tax move will not lose us any votes, but dropping fuel at the pumps by a penny will gain some”?

    More likely; if we can get the price of hydro-carbons up, the subsidies for wind turbines and solar panels, won’t look so ridiculous.

    As I am currently number crunching French and German “Feed-in-Tariffs” (FIT), a little factoid falls out of the spreadsheets. The recent average wholesale price for electric in France was Euro 50 per MWh. The French FIT is paying Euro 500 per MWh, ten times as much. Similar in Germany. I am still data mining the UK numbers but expect a similar answer. Why farm crops when you can farm photo voltaic panels by the hectare!

    • Posted May 2, 2011 at 9:14 am | Permalink

      Agreed the whole thing is absolutely a mad green religion making no engineering or economic sense at all with current technology.

      Tipping money down the drain because they think there are votes in the green religion. How many votes will there be when people have these on their roofs and realise they have been sold a pile of expensive pointless rubbish?

    • Posted May 2, 2011 at 2:03 pm | Permalink

      The compensation paid to the Scottish wind farm did seem a little on the high side…..

    • Posted May 2, 2011 at 4:11 pm | Permalink

      Yes paying 10 times the rate for electricity that is in fact worth perhaps only half as much (as not available on demand). So 20 times the true value paid out of taxes – sounds pretty mad to me but perhaps Mr Huhne can explain. Maybe he could also tell us the true economic and co2 “return” on his personal green badge home turbine. As I am sure, if he genuine, he would not wish anyone else to waste their money on these pointless rotating house badges.

      He seems most agitated by what he calls the AV no referendum “lies” – perhaps he will also look at some of the Green lies for a change.

    • Posted May 3, 2011 at 10:51 am | Permalink

      Quote “The bit that bothers me is, how did the tax get to be 81%? Is there an ideological hatred of natural gas in the coalition?”

      Surely before you can discus that you need to establish who owns finite natural resources like gas and oil .

      My position is a fairly Georgist one that ownship is split between current and future generations of British Citizens as a birth right . Because future generations have a claim on it I don’t think it’s right that the current generation should just get it for nothing .

      Of course exploration and production companies need potential rewards to make the incredible risk worthwhile .

  3. Posted May 2, 2011 at 8:54 am | Permalink

    Energy provision in this country is an expensive shambles, largely due to politicians seeing it as a tax milch cow. I read yesterday in the Sunday Times that £900,000 was paid out recently to wind farms in Scotland NOT to produce electricity. With Huhne as Secretary of State for Energy and Climate Change things will deteriorate further. Given his attacks on his cabinet colleagues during the referendum campaign his early removal office would provide the opportunity to appoint someone with the abilities to see the long term strategic needs of energy provision for the people and businesses of this country rather than for revenue provision for the government – if such a politician now exists.

  4. Posted May 2, 2011 at 9:52 am | Permalink

    The problem we have is that the political class of all complexions knows nothing about real added value creating business and could not care less either. They have allowed our technological base to be destroyed by deliberate sabotage and wanton neglect in the absurd belief that it could be replaced by financial spivery such that the best engineering graduates are now consumed by the City’s syphoning and recycling circus rather than in creating real wealth in industry.

  5. Posted May 2, 2011 at 9:53 am | Permalink

    There is a misapprehension in the public at large that since the oil (the Chancellor recently said it is the governments oil and the government wants it’s fair share – apparently 81% is fair) is in the ground that it doesn’t matter what the tax rate is, eventually someone will drill for it and we’ll get the revenue at some point in the future.

    For new fields that may well be true, unfortunately new fields count for very little of the mature UKCS production – and are years away in any case.

    Exploration isn’t what this super tax is hitting. It’s old fields where the oil / gas is no longer coming out of the ground like opening a shaken bottle of pop but to extract the remaining recoverable reserves large investment is needed in new technology. This investment can be tens, even hundreds, of millions to upgrade these old platforms.

    If you are a multinational company, or a small company with a limited development budget, are you going to invest that massive sum (the bulk of which will be spent with UK engineering firms) in a field that is being taxed at 81% or will you simply get what you can out of that field with existing equipment then decomission it and invest that money elsewhere in the world (the bulk of which will be spent with that country’s engineering firms)?

    You don’t need to be an expert in the oil & gas industry to work out the anwer to that one.

  6. Posted May 2, 2011 at 10:10 am | Permalink

    We have a problem as no one has reversed the insane combination of Energy and Climate change into one department. A department of energy should be trying to explain to the Treasury why adding political uncertainty to high cost of production is a mistake when you are competing for capital with projects around the world.

    This department might have been a good dating service for #RedEd, but its going to ensure the lights go out in the UK.

    I’m not sure the UK public has woken up to how much the traditional oil companies have pulled out of the UK. Soon Exxon (Esso) now runs a UK refinery. Shell & BP are selling of existing assets in the North Sea. The skills base that this country trades on so successfully is being undermined as we become a branch office for the Chinese, Indian’s and Saudi’s.

    Somebody really does need to get a grip – and the first stage in this will be to move the Climate Change lobby out of the Department of Energy.

  7. Posted May 2, 2011 at 10:11 am | Permalink

    Should be – only Esso & Total run a UK refineries from the recognisable names of major oil companies.

  8. Posted May 2, 2011 at 10:17 am | Permalink

    If further proof necessary that the reason the economy is so sluggish is because it’s been regulated and taxed to death.

    Until we do something radical about the EU (preferably withdraw), repeal most of the senseless Equalities Act that the Tories incomprehensibly allowed to pass into law, and slash our taxes, I predict the economy will remain moribund.

  9. Posted May 2, 2011 at 10:26 am | Permalink

    This goes to the root of the problem – as usual.
    Schoolchildren used to aim at a job in “the City”, or to be a “Captain of Industry”, or one of the (independent) professions. Today their very best options are to work for the ever present government: Head teacher, consultant, local government with expenses, MEP. Failing that, there is always the dole, self sufficiency benefit, etc etc. And don’t forget the free Council House, free Car, Free Council Tax and all the trimmings.
    Workshop of the world has now become workshy of the world. And those who do not work go cold and hungry eventually.
    That is why the taxes are so high: the government needs them to run the country.
    I keep saying this, just like Mr Cameron used to. I seem to have been consistent though…….

  10. Posted May 2, 2011 at 10:54 am | Permalink

    Maintenance sounds reasonable to do it in the summer.

    In 4 months time in winter the gas will be worth 2% more versus the depreciating pound (policy as demonstrated by BOE) so it will reopen. Its a short term issue.

    Support for manufacturing needs NI reductions on staff and flexible energy costs hopefully fixed in price in £, with minimal fuel costs, (nuclear,coal,gas,biomass) and a continually depreciating pound. We have managed the latter so, it makes sense to invest in public infrastructure we will need when the stagflation ends and with the base debt has eroded(plus savings) for a new fiat debt splurge. Why would anyone hold treasury bonds? pension funds and banks compelled by law?

    How many days gas useage do we stock now as a strategic reserve? still only 7-14 days. Mandating more central storage will even out price swings and aid transparency in pricing.

    Whats happening on the nuclear front or are we waiting for the patented Chinese/Indian thorium fueled reactor technology? OR is it the central EU dictat to let the French build maintain and produce the nuclear power for the EU.

    Despite what lifelogic says, the direct subsidy and jobs for renewables will not be seen as a waste if the £ continually depreciates at 5% and we think +30 years. After 30 years we replace the windmill/water/solar etc the same site same grid connection rather like building new nuclear near the old builds but simpler.

  11. Posted May 2, 2011 at 12:31 pm | Permalink

    We certainly have the lunatics running the asylum, Huhne with his useless wind farms and now Osborne taxing gas out of play, how daft can it get? We are due to lose something of the order of 40% of our generating capacity over the next few years. How is this going to be replaced in the time available, they haven’t even started yet. I also noticed a few days ago that our major power stations are allowed to operate for 20000 hours by the EU but due to the bad winters are half way there already, so bringing the energy shortage that much closer. And Cameron wants industry back? He penalises them every way he can and asks them to come back for more???

  12. Posted May 2, 2011 at 1:38 pm | Permalink

    I have come to the conclusion that the coalition government is not pursuing a “policy for growth” as it would have us believe. Instead it is doing the exact opposite. It is pursuing a policy for decline. The additional taxes imposed on the UK oil and gas industry are only part of the evidence for this assertion. Even more evidence is afforded by reading the Carbon Plan, the document which with its companion Excel spreadsheet spells out the UK road to ruin as it implements the Climate Change Act.

    It is a fact that the said Act and Plan are both based on a highly questionable and much disputed hypothesis about the role of CO2, to the exclusion of just about every other influence on the earth`s climate. It is also a fact that the UK`s finest engineering minds are of the opinion that what the politicians desire cannot actually be achieved for the simple reason that the technology does not exist to control global temperature or CO2 levels to the levels decreed by the Climate Change Act. These same engineers have also declared, no doubt correctly, that the futile attempt to implement the Carbon Plan will cause a significant decline in the UK standard of living.

    There is no good rason for any manufacturer to locate their business in the UK. The energy supply will be uncertain; it will be expensive to pay for the fossil/nuclear fuelled duplicate capacity that must be installed to back up unreliable wind and solar fuelled power; and, as a final disincentive, the manufacturer will be invited to sign a negawatts agreement not to use the capacity he will have expensively installed. You really could not make it up.

    I used to think that the architects of this policy (the three leaders of the three main parties) were chumps to espouse such policies. Now I suspect it may be much more sinister. They actually want this national decline to occur. They are well on their way to achieving their aim.

    • Posted May 3, 2011 at 3:14 pm | Permalink

      They are certainly working on it, hard. I really do not understand how Cameron can say that he wants the industry and then sets out to destroy it. I am just reading for the second time, “Atlas Shrugged” and must say that it is a warning, Cameron seems to think it is an instruction manual. If he has ever heard of it that is?

      • Posted May 4, 2011 at 9:01 am | Permalink

        Not to turn this into a discussion on Atlas Shrugged (still waiting on the film making it’s way to my secluded neck of the woods) but it’s amazing how much of the, at the time, ludicrous positions of the statists is now part of the modern lexicon of politicis.

        The ‘Equality of Opportunity Act’ and the ‘Fairness Doctrine’ (which ruined the economy in the novel) are now firmly entrenched as government policy here in the UK.

        Big Brother really does think he knows what’s best for us, and what’s sad is that most of Britain seems to believe that too.

  13. Posted May 2, 2011 at 2:16 pm | Permalink

    80% tax – is pure GREED by the Government. They are playing financial chicken with oil companies. Squeeze them until they get just enough profit to survive rather than alot of profit to explore further. Why aren’t they intelligent and tax at a lower rate and give away tax for research. Talk about killing the goose that laid the golden egg. A days thinking could make millions – but they chose the short term option

  14. Posted May 2, 2011 at 2:36 pm | Permalink

    Yes but what is the tax rate across the whole of the Morecambe field which you don’t tell us, as against telling us that parts of the field carry an 81% tax which suggests you’re presenting the facts for an argument which suits your purpose.

    You obviously want to make that argument for less tax. But perhaps there’s one for strategic resources too. In which case, let’s take another look at the coalfields and the fellas in orange overalls which a cabinet of which you were part consigned to disability benefit in their millions.

  15. Posted May 2, 2011 at 4:38 pm | Permalink

    I am reminded of Ronald Reagan’s comments about tax on taking office along the lines of if it moves TAX IT,WHEN will the political class ever learn,some are even supposed to be economists or understand it,have they NEVER heard of THE LAW OF DIMINISHING RETURNS,if a dog spins around fast enough it dissappears up it’s own ….hole

  16. Posted May 2, 2011 at 6:10 pm | Permalink

    By importing more gas we weaken the Pound. Maybe that is the real reason?

    Re the wind farm business others have commented on – we need more distribution links both within the UK and for export and/or more pump storage schemes. (Of course exporting more electricity would also tend to strengthen the Pound – is that regarded as a good thing?)

  17. Posted May 2, 2011 at 6:19 pm | Permalink

    JR are you being kind in not mentioning the effect on the balance of payments.
    in my youth and early working life the balance of payments problem was the excuse for all sorts of things including massive devaluation.
    surely importing gas adds heavily to these and we must get it under control.
    i may have missed it but you havent touched on this subject for a while.

  18. Posted May 2, 2011 at 7:21 pm | Permalink

    I do find that whichever Party is in Government does not live in thre real world. To believe that oil and gas companies can continue to incur tax increases year on year without any impact is tantamount to being in denial. It seems to be that Chancellors become blind to the value of money as the sheer size of the numbers are aligned to “toy town” money because the numbers are so large.

    In the last few years, oil companies tax burden has doubled whether it be from CGT or PRT the higher being at 81%. There are not the major undeveloped oil and gas finds as was in the 1970’s and 1980’s and what once was seen as the jewel in the crown fields are being sold and abandoned or are being purchased by the oil minows. However, what one has to understand, is these fields only have a finite life and unless drastic cost cutting can be achieved they will not continue to be economic.

    This latest tax burden has had a significant impact in the industry and will make some of these fields sub-economic.

    Drilling programmes will be deferred and hence drilling rigs will be “stacked” with further unemployment impacting the economy.

    In addition, marginal fields that the minows were looking at developing will be either deferred or relinquished back to DECC. The impact may not be seen in the near term, but opportunities that were in the pipeline will not come to fruition and those fields which are only just economic will start abandonment planning. Once a platform does stop production for any length of time, it would require capital of an order of magnitude higher than under normal operating conditions to re-start production. I suggest this would not be either realistic or economic.

    Finally, another nail in the coffin for the oil and gas industry is the the tax relief on decommissioning oil fields has also been reduced according to the latest Budget Report (unless this was a typing error). This will have a further detrimental impact, as tax breaks will be less, making the economic justification to continue in production unachievable.

  19. Posted May 3, 2011 at 12:26 am | Permalink

    the decision to impose an 81% tax on some gas fields does seem very strange indeed. There’s no reasonable logic to say that this is counterbalancing car fuel duty (as the Treasury seems to be saying) – because natural gas has no part in the production of petrol or diesel. I do hope that this decision will be reversed before its counter-productiveness can be witnessed.
    Andrew Miller

  20. Posted May 3, 2011 at 9:06 am | Permalink

    ”If part of Morecambe fails to re-open, we will simply import more gas from elsewhere, adding to the pressures on world supplies of hydrocarbon.”

    The world is awash with gas. If you increase the cost of domestic gas production the UK gas companies will buy it from a cheaper source. There is no shortage of gas worldwide and the price is no longer linked to oil. Have you not been informed of shale gas?

    • Posted May 3, 2011 at 4:27 pm | Permalink

      Not that simple I’m afraid. There is no shortage of gas, but it needs to be transported. The gas fields and their pipelines are controlled by limited number of States/corporations and therefore price remains high.

    • Posted May 4, 2011 at 1:53 pm | Permalink

      “Shale Gas” is pie in the sky. You wait and see.

  21. Posted May 3, 2011 at 3:07 pm | Permalink

    Do you remember Margaret Thatcher’s bon mot “We believe that oil prices should be determined by market forces. OPEC is not such a force.” Well, tax at 81% can be considered as part of market forces, I suppose – but rather a bizarre component.

  22. Posted May 4, 2011 at 1:56 pm | Permalink

    We now begin to see the oil and gas companies response to the extra tax burden placed on their industry. Oil and Gas companies are not banks, they do not threaten, they act. Drastic cuts are being made to their budgets, projects scaled back, drilling deferred, abandonment considered, this in turn means job loses. This is totally at odds with the picture G. Osborne said he wanted to present, of the UK being open for business and enterprise.

    The word is out, investment will happen, but not in the UK, it is now classed as an unstable tax regime to do business for oil and gas companies. They will use their money wisely in Countries who value their business.

    This is what comes of short term popular measures to please the people, but destroy future investment in the UK.

    What kind of Government is this, certainly not a Conservative one.

  23. Posted May 4, 2011 at 8:41 pm | Permalink

    Dear John,

    I’m pretty interested in British manufacturing and how it’s changed/declined over the last six or seven decades. Are there any books you could recommend on the subject?

    Thanks,

    Daniel

    Reply: I do not know of a good account of the changes over that time period, but someone else blogging here might help. I may write more about it soon – the two biggest changes were the moves into and out of nationalisaiton for important sections, and the coming of Japanese management, capital and lean manufacturing thinking.

  24. Posted May 5, 2011 at 1:34 pm | Permalink

    I notice no Scottish fields are earmarked for closure. I thought it was a masterstroke by Cameron to directly affect Scotland with taxes for a change, instead of disguising how England is paying for everything. I believe Cameron’s attempt was to force the SNP’s independence bluff at today’s elections. Unfortunately, energy companies have targetted the easy bullseye, England, and thus undermined Cameron’s efforts.

    I wonder how many of the directors of the company controlling Morcambe Bay gas fields are Scots?

    The fact that an English field has been chose and not a Scottish one makes one think that the Scottish parliament has more influence than the British Parliament currently mismanaging England.

    When MPs in England stubbornly fight for the Union at the expense of their own constituents, then it is no wonder companies join in with them.

    Yet another discriminatory practice against England due to the partial devolution designed to weaken the Tory constituency called England. I doubt any Tory MP close to Morcambe Bay will point out this discrimination.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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