Centrica leaves gas field idle due to newly imposed UK taxes

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, June 7 -- Centrica PLC, parent company of British Gas, acted on its earlier threat to stop production at South Morecombe, the UK’s largest gas field, in response to the British government’s recently imposed windfall tax on North Sea profits.

“Decisions on when to run the field are made on a commercial basis, taking into account market factors, operating costs, and earnings,” the company said. Last month, Centrica stopped production at Morecambe Bay, a reservoir in the Irish Sea about 25 miles west of Blackpool.

At the time, a spokesman said the closure was due to planned maintenance, but he also underlined the possibility of permanent closure due to the effect of the new taxes on the profitability of the field.

"At these higher tax rates, Morecambe's profitability can be marginal," the spokesman said, adding, "We may choose to buy gas for our customers in the wholesale markets in preference to restarting the field after planned maintenance (OGJ Online, May 9, 2011).”

London increased the supplementary tax levied on oil and gas production from UK waters at prices of more than $75/bbl to 32% from 20%. That decision, announced in March, raised the total tax rate for Centrica’s South Morecambe field to 81% from 75%.

This week Centrica said it would assess on a daily basis whether to reopen South Morecombe, while saying that its smaller North Morecambe field, which is subject to a lower tax of 62%, would “resume production shortly.”

Together, South Morecambe and two neighboring fields can provide 6% of the UK’s annual gas demand, or up to 12% of the country’s domestic household requirements.

The British government has come under considerable criticism for its imposition of the tax, with a number of firms and lobbying groups voicing their opposition.

“The surprise nature of the tax increase has created fiscal uncertainty not only in the oil and gas sector, but across the energy infrastructure investment supply chain,” said John Cridland, director general of the Chamber of British Industry.

“As you know, companies have global opportunities for investment and I believe the tax, together with the restriction on decommissioning relief, will weaken investment in North Sea energy production,” Cridland said in a letter to the UK’s Chancellor of the Exchequer George Osborne.

Despite such criticism, the UK Treasury has declined to revise its position on the windfall tax, claiming that “we do not believe the tax changes in the budget will materially affect investment in the North Sea.”

Contact Eric Watkins at hippalus@yahoo.com.

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