ONS figures show serious decline in UK oil & gas industry profitability

UK’s Office for National Statistics (ONS) has published yesterday (April 9, 2015) its report on profitability of UK companies in the Q4, 2014.

According to Oil & Gas UK, the figures show the continuing serious decline in profitability of the UK oil and gas industry.

The figures show that the estimated net rate of return for United Kingdom Continental Shelf (UKCS) companies in Quarter 4 (Oct to Dec) 2014 was 10.4%, which is the lowest recorded estimated rate since the series began in 1997.

This was the third consecutive lowest estimate and was 2.0 percentage points lower than the previous quarter. According to the ONS, this may be due to the recent decline in oil prices.

UKCS companies are defined as those involved in the exploration for, and extraction of, oil and
natural gas in the UK.

Oil & Gas UK’s chief executive, Malcolm Webb, commented on the ONS profitability statistics: “These shocking figures underline the very serious challenges the sector faces. After more than a decade of spiralling costs, over-taxation and weak regulation, the UK offshore oil and gas industry is now bottom of the league in terms of the cost of producing a barrel of oil and gas. The UK’s difficulties have been greatly exacerbated by the sudden drop in oil price but it would be a grave mistake to believe that the price fall is the cause of the problem. A recovery in the price, even to $100 per barrel, would not resolve matters.

 Net Rate of Return of UKCS Companies, Quarter 4 (Oct to Dec) 2006 to Quarter 4 (Oct to Dec) 2014
Net Rate of Return of UKCS Companies, Quarter 4 (Oct to Dec) 2006 to Quarter 4
(Oct to Dec) 2014

“The restructuring of the tax regime announced by the Government in the Budget and the establishment of the Oil and Gas Authority can encourage the much-needed future investment. However, unless the underlying cost and efficiency challenge is first tackled and overcome, the productive future of the UK North Sea will be severely constrained and there will be a very much smaller industry to tax, regulate and invest in.  All companies are now working hard to address the cost base and to improve the efficiency of their operations. This is very important work because we need to see a 40 per cent improvement in unit operating costs if we are to secure jobs and investment for the medium and longer-term.”

The ONS profitability report is available here.

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