UK: Centrica's South Morecambe gas field may remain closed

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6 May 2011, Oil, Gas

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Centrica is closing three fields in Morecambe Bay for maintenance purposes, and may not reopen one of them, as higher taxes make profitability at its South Morecambe field "marginal," depending on gas prices. To compensate for lost volumes Centrica may import gas through the wholesale markets, leading to an increase in costs that will "feed through to consumers," according to a Centrica spokesperson.

Before the tax increase was announced, Centrica had already signed a deal to import liquefied natural gas from Qatar in order to provide up to 10% of the UK's gas requirements over the next three years. Therefore, it is difficult to tell whether any move to halt production at South Morecambe and substitute its output with imports is actually the result of the windfall tax, or instead a business decision that might have been taken in any event.

The Treasury insists that the windfall tax cannot be passed through to petrol prices, as - being separate from the North Sea oil companies - independent retailers can buy their petrol from anywhere. Besides which, BP and Shell only derive 5% of their profits from the North Sea. Gas and electricity costs for consumers are also unlikely to be raised due to expensive import substitutes, as at present there is ample supply and sluggish demand, which should keep wholesale gas prices low for the next few months.

Chancellor George Osborne is considering offering tax breaks to gas companies investing in the North Sea. Any fall in the oil price would reduce the new oil tax, thereby alleviating profitability concerns, yet oil price outlook remains positive, with the Treasury stating that "average post-tax profits per barrel are forecast to be higher in the next five years than the last five." So it seems that the industry's fears might well be unfounded.

However, if the slack in the gas markets is used up and the proposed tax breaks are either not implemented or ineffective, leading to more expensive gas imports, then the windfall tax may be passed onto consumers after all. In addition, investors will likely seek out other drilling opportunities, causing thousands to be made unemployed in the UK. It is difficult to know which figures to trust. After all, The Guardian reported that in 2005 the Treasury's windfall tax ultimately caused a drop in tax revenues as a result of a slump in drilling activities. Where Labour failed, hopefully the coalition government will succeed.

Source: Datamonitor

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