The oil reality
Nicholas Davenport
The Paymaster-General, Mr Edmund Dell, and the Chancellor of the Duchy of Lancaster, Mr Harold Lever, are to be congratulated on giving the oil companies a real incentive — at long last — to get on and go all out for the development of our North Sea oil fields. Progress had been held up for a year or more by prevarication and uncertainty. The Tories started it by saying that they would tax 'excess' North Sea oil profits, whatever that meant. The Labour manifesto of October 1974 declared that they would impose "a substantial extra tax" and threatened the companies with virtual nationalisation. The ominous words were: "Take majority Participation in all future oil Licenses and negotiate to achieve majority state participation in existing licences." Mr Lever has rightly been going slow on this extravaganza. Seeing that our borrowing requirement has shot up to near £8,000 million the important thing was to get the petroleum revenue tax settled amicably and sensibly so that the oil companies could get on with the job. This has now been done.
The PRT is to be 45 per cent and IS to be levied on the profit remaining after paying royalty of 121/2 per cent and covering production expenses (Corporation tax of 52 per cent comes later on what remains.) As double taxation would not have encouraged the development of marginal fields the following incentives have been added. First, all companies are to be allowed to recover 175 per cent of their capital expenditures before becoming liable to PRT. Second, all fields will have an allowance of one million tons a year for ten years free Of PRT. Third, marginal fields can either qualify for relief of royalty Payments or claim extra relief from PRT. Fourth, PRT will be waived if in any year it reduces the return on a field before corporation tax to less than 30 per cent on capital expenditures measured on a historic basis. This is an important provision because the government would not allow a company's losses on one field to be offset against Profits on another — an unheard of disadvaRtage in the risk-taking of an oil drilling venture. Having had some experience of the oil business in my youth I am convinced that the government would not have
secured the rapid development of these expensive, difficult and dangerous North Sea fields if it had not offered these incentives.
Of course, the Marxists and the Tribune fanatics regard the terms as a sell-out to the oil companies but they are as ignorant of the business risks as their master, Mr Wedgwood Benn. And they are oblivious to the stark economic facts of our national life. With a deficit on our balance of payments last year of £3,700 million we have had to borrow abroad colossal sums. The Treasury not long ago gave a list of these borrowings from the date (March 1973), when the programme started. It amounted to no less than $5,100 million and this did not include the $2,500 million raised for the government in the Euro-dollar market by the clearing banks (of which Mr Healey has now drawn $1,500 million) or $800 million remaining of the Shah of Iran loan of $1,200 million. The government could not have raised loans abroad totalling $8,400 million without in effect pledging our future oil revenues from the North Sea (without them sterling would be sunk).
Happily there could be some prolific oil fields under these wicked waters. Nobody knows exactly how petroleum was formed — out of some marine organism certainly — but it is evident that more of it was deposited in the Jurassic age, about thirty-one million years ago, than in any other. At that time the earth's climate was very hot and a large part of its surface was coveredby a warm shallow sea. Curiously enough I live west of Oxford on the exposed Jurassic sands and can show my visitors a fossilised coral reef complete with ammonites but lacking the oil which is only produced when trapped and covered over by later rock deposits. The prolific oil fields of the Middle East date from the Jurassic age but no geologist ever suspected that beneath the igneous rocks lying between the Shetlands and Norway the drills of, the oil companies _would hit upon the Jurassic sands. But this they did in the fields which are called Cormorant, Brent, Thistle and Ninian. A little to the east of Cormorant it has been proved that the Norwegian Stratfjord field (also Jurassic) extends into British waters. A pipeline is projected to link these potentially large fields with a Shetland base.
Further south, east of the Scottish coast line lie the Forties and below them the Ekofisk, Auk and Argyll fields which are in the Cretaceous and upwards — from 125 to 65 million years ago. Much further south, east of Lincoln and Norfolk, we get into a very different and much older geological formation — the Carboniferous — which produces gas. This comes from decayed vegetable matter lying over the coal measures. Dr Gaskell, the clever geologist of BP, now retired, predicted these huge gas fields before the drills even got to work but he told me that they would never find oil. He was right for the southern half but what a miracle it was to be able to drill through igneous rock up north in over three hundred feet of water. The divers who attend to the rigs and pipes deserve their £1,000 a month which they earn at the risk of their lives.
The first field to come on stream in May is the small Argyll field which will pump into a tanker from an SBM (Single Buoy Mooring system). It will produce only 40,000 barrels a day (7 barrels -1 ton). Now that real incentives have been given to the oil companies — the Argyll field will probably never pay much PRT — production will begin to pile up in 1976 after the Forties field comes on stream With 400,000 barrels a day towards the end of this year. The big Jurassic fields like Brent and Ninian may each turn out 500,000 barrels a day. By 1980 we should be getting 2.3 million barrels a day from all the fields which should be more than enough to cover our entire consumption of oil. The gas fields in the southern North Sea are already able to meet the Gas Board's needs with the help of some natural gas imports. If oil prices do not fall within the next four years the relief to our balance of payments by 1980 will be miraculous.
This shows how wise the government was to give sufficient concessions to the oil companies to ensure that we shall get the oil out of the North Sea in time to rescue us from bankruptcy. The fact that this is another sign that the moderate socialists who hold the key positions in the Cabinet are anxious to see that private enterprise does not collapse but work profitably and invest was responsible for restoring life to the bull market on the Stock Exchange. As I predicted some time ago the market index has marched on to 300.
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