One thing we have learnt this week- future oil and gas prices

Its a brave person or organization that attempts to predict future oil and gas prices.  One such body is the Office for budget responsibility (OBR).  Set up by the last Tory led coalition as a political wheeze, its proving quite useful criticising the current government of the UK when it feels its necessary.  As its name implies it makes budget predictions and as part of these it must consider oil and gas prices and hence revenues from UK oil and gas production (mostly but no entirely in the North Sea).  Until recently the tax income from this was an important source of tax revenue.  No longer.  Oil production hit a peak in 1999 and will never recover.  This and the falling oil price have decimated revenues (see below).  However,  what is of interest is the OBR in their latest report do not see any quick recovery in oil or gas prices (see graph below).  They also do not see any recovery in UK oil and gas production (also shown in the graphs below using OBR data).

oil and gas price projections

See this graph below lifted from the OBR report below which shows long term projections for the oil price.

obr oil price forcast 2015

The lower oil and gas prices and falling production has had a calamitous effect on revenues.  Between now and 2020/1-2040/1 the tax revenue from the North Sea could be as little as £2 billion or even -£5 billion.  This last last figure raises an important problem.  As the rigs come to the end of their life they need decommissioning.  The exact cost is unknown, but very high.  One estimate is as much as £32 billion.  It looks like the North Sea is entering a phase of making a huge loss.

Neil

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