A Golden Goose

North Sea rig in a storm.

North Sea oil, not much left and we don’t even have a Sovereign Wealth Fund to show for it. Up to a point, Lord Copper.

The Brent programme for May is 116,000 bpd up from 80,000 bpd in April. Actually, not much of that is Brent anymore: Brent, Forties, Ekofisk and Oseberg – the last two sound like characters in The Ring – make up what is loosely called Brent for pricing purposes. North Sea production peaked in 1999 at 6 million barrels per day. This includes Norway and Denmark but nevertheless there has been a significant fall in UK production since then.

It would have been ridiculous for us to have a Sovereign Wealth Fund. We would have been borrowing money with one hand and investing our oil revenue with our lenders with the other. Norway could afford to set aside their oil money for future generations.

Petroleum Revenue Tax (PRT) and Corporation Tax have been rather a success. The former was invented in 1975 to make sure the UK got its share from oil companies in the North Sea. Its architects were way ahead of their time. They ring-fenced revenues to prevent vertically integrated major oil companies minimising profit by selling oil at artificially low prices to minimise tax. This is precisely what companies like Amazon, Google and Starbucks attempt now. Successive UK governments have nurtured this golden goose.  Depending on the age of an oilfield, tax is levied between 61% and 82%.

An unintended side-effect of ring-fencing North Sea oil revenue was the creation of a transparent price. Brent has become an international benchmark from which other crude oils are priced, although some critics say that sometimes the tail wags the dog as Brent production falls. It spawned derivative markets of which the most visible is Brent Futures, a market that gave me employment since the 1980s. The average daily volume here is about 700 million barrels a day. Actual Brent production is 100,000 barrels a day. This leaves open the possibility of the futures price being manipulated by means of the much smaller market in physical Brent.

Off-shore oil production in the UK will continue to decline. It may partially be replaced by on-shore gas extraction using hydraulic fracking. That depends on whether oil prices are high enough to make this viable, how ingenuous we are at cutting the cost of production using new technology and how we take care of the golden goose that has laid eggs for us since 1975.