Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 04 May 2015 at 1:34 GMT

#Election2015: High stakes for North Sea oil and gas

Head of Commodity Strategy / Saxo Bank
  • Last UK election North Sea crude cost $80, then averaged $100 over five years
  • Brent now in the mid-sixties, not enough for most North Sea fields to break even
  • The main UK parties favour tax cuts in response to the current price slump

By Ole Hansen

Five years ago the coalition of Conservatives and Liberal Democrats were handed the keys to govern the UK for the next term. On election day the price of one barrel of North Sea crude oil as changing hands at $80/barrel while UK oil production was running at 1.5  million b/d. 

 Some of the worst hit operators need break evens of closer to $86/b. Photo: iStock

The emergence of peak oil fears and the Arab spring in early 2011 led to five years of elevated but stable prices with the average price during this five-year period averaging $100/b. This was a golden period for oil producing countries able to respond to rising prices by producing more. While in countries such as the UK, where production has been falling, the price inflation within the oil industry helped erode the profitability of producers involved in the UK Continental Shelf.  

Brent crude - 5 year performance

Source: Bloomberg, Saxo Bank 
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Fast forward five years, and the price of Brent crude is trading in the mid-sixties following a spectacular collapse from last June up until this January. Since then a floor has been established, creating a sense of relief among oil producing nations, most of which were caught out by the rapidly declining oil price.

Five years later UK's oil production has slumped below 1m b/d to levels last seen in the 1970s. The UKCS is maturing fast and as a result the cost of extracting from this technically complex and geological challenging area has been going up, meaning the break-even price at which it becomes economically viable has been going up as well.

Brent crude oil, according to estimates, now needs to trade above $60/b in order for most fields in the North Sea to break even. Some of the worst hit operators drilling hundreds of miles of the Scottish coast need break evens of closer to $86/b.

UK oil production and proven reserves

Source: EIA, Saxo Bank

In order to support the UK oil industry which employs more than 400,000 people across the UK, Chancellor George Osborne announced tax breaks for North Sea oil and gas operators in his last budget. This was a reversal of the tax grab of 2011 which occurred at the time of rising prices. The tax break, according to the governments estimates, is projected to boost production by 15% by the end of the decade. 

In order to extract up to 3bn barrels of proven reserves the UK oil and gas industry will either need to see the price of crude oil recover back towards $100/b or continue to receive the support from whatever government is in power. 

The main national UK parties all favour tax cuts for the offshore sector in response to the current price slump and any new government of whatever colour could well go further in order to secure the future of the sector, not least considering the considerable amount of proven reserves still available.

A Conservative-led government will have to weigh up additional measures against its desire to continue its deficit-reduction targets.

A Labour government would probably prefer to throw the money after the public sector instead, but according to the latest polls Ed Milliband is unlikely to receive the keys to 10 Downing Street without the support of the Scottish National Party. The oil sector dominates the Scottish economy and with independence not coming anytime soon, the SNP will seek to get as much support as possible from Westminster.

-- Edited by Susan McDonald

Ole Hansen is head of commodity strategy at Saxo Bank, the home of social trading
anko anko
now then for short in the crude, anyway i am short, we see if price make move down for a longer term


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