UK faces years of negative oil sector revenues

The U.K. government's forecasting unit has slashed its oil income expectations for the next five years, predicting negative revenue from sector taxes this year as crude producers continue to struggle under low prices.

The latest figures released by the Office for Budget Responsibility (OBR) project U.K. oil and gas revenues to be "slightly negative," with losses set to total £10 million ($14 million) for the 2015-2016 fiscal year. Government earnings from the 2016-2017 fiscal year until 2020-2021 have been revised down by an average of £1.2 billion ($1.7 billion) each year.

A worker looks out onto the weather deck of the Armada gas condensate platform, operated by BG Group Plc, in the North Sea, off the coast of Aberdeen, U.K.
Simon Dawson | Bloomberg | Getty Images
A worker looks out onto the weather deck of the Armada gas condensate platform, operated by BG Group Plc, in the North Sea, off the coast of Aberdeen, U.K.

That's compared to £2.2 billion in revenue in 2014 to 2015, and £11 billion in 2011 to 2012.

Abhishek Deshpande, an oil and gas analyst at Natixis, told CNBC by email that the downward revision "is not at all surprising," noting that oil prices have dropped 27 percent from where they sat at $48 per barrel as of the last OBR forecast in November, to $36 per barrel at the beginning of March.

The negative revenue forecast "is clearly showing the difficulty the oil producers in the North Sea face despite the talks on cost reductions," Deshpande explained.

The OBR makes its calculations using futures prices for the first two years of its forecasts, and then holding those flat in nominal terms.

Oil prices have been under pressure thanks to many producers ramping up production despite a global glut. U.K. oil production, for example, rose by 12.8 percent in 2015 — a year when oil prices dropped over 31 percent.

The price crisis has also caused difficulties for resource-rich countries like Norway, which dipped into its oil-driven sovereign wealth fund for the first time in January since it was established in 1996. Norges Bank also downgraded its oil industry investment expectations Thursday morning, forecasting a 12 percent cut for 2016.

"We are also expecting oil companies in the U.S., particularly (those) that are not well hedged and in expensive basins, to have negative cash flows as well if (the) oil price does not recover fast," Desphande said.

Back in the U.K., the Conservative government is willing to exacerbate its own revenue losses to easing the tax burden on the oil and gas sector.

In the government's budget speech Wednesday, Chancellor George Osborne's announced a 35 percentage point cut to the petroleum revenue tax to zero, and reduced the supplementary charge to 10 percent. The move is expected to lower receipts by around 0.2 billion per year, starting from the period running 2016 to 2017.

It's a long-term view that the government hopes will boost sector returns.

"There are only a few profitable firms in the sector," the OBR report explained.

"Lower tax rates will boost the post-tax returns on oil and gas production, but we have assumed only a modest behavioral response. As noted earlier, the low oil and gas price environment will make it difficult for projects to clear investment hurdles," the report added.

"This is likely to be the case even with lower tax rates."

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