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Tax cut may spur interest in UK onshore oil drilling

Source: Reuters - Tue 1st Sep 2009

Small oil companies say they are likely to increase exploration onshore in Britain, spurred on by low capital expenditure and lifting costs, as well as by a government tax cut.

In April, Britain cut the tax rate to 30 percent from 50 percent on small oil fields, estimating it could unlock about 400 million barrels of North Sea oil plus an unspecified amount onshore with a view to securing reliable energy supplies.

The bulk of Britain's oil comes from fields in the North Sea and only about 2 percent comes from onshore. UK oil and gas output is falling from its 1999 peak and the government wants to slow the decline.

"It's a viable business because of the low lifting costs and the low capital expenditure. The flip side is that the typical size of the fields is small" said Alessandro Pozzi, oil analyst with Edison Investment Research.

"If they manage to maintain this 30 percent tax rate on onshore fields as well, that will be a good thing. You will see probably even more companies doing exploration" he said.

In its most recent licensing round, Britain awarded 96 new licenses for onshore exploration to 54 companies, and they are now applying to various local authorities for permits.

"It's actually quite an incentive to explore" Paul Barrett, chief executive of Europa Oil & Gas, said of the tax cut.

Europa has three producing fields in Britain, five exploration permits, and plans to drill two wells in the next 12 months. 


While North Sea oil is difficult and costly to tap because of the remote location, local opposition can be an obstacle for companies working onshore.

Residents of Coldharbour, a village in the affluent county of Surrey south of London, are opposing Europa's plans to drill a well nearby.

In Surrey, there have been two applications for exploration and one for an appraisal in the past year. In Lincolnshire, eastern England, five applications for well tests or drilling were granted in 2008-09, while last year Dorset in the south granted a temporary testing license to Egdon Resources .

"Obviously, that makes a big difference" Egdon's CEO Mark Abbott said of the tax cut. "We see a lot of potential for a company of our size in terms of additional prospectivity."

The tax change applies to 75 million pounds of profit made by companies drilling on fields with less than 25 million barrels of recoverable reserves.

Companies including Providence Resources, Egdon Resources, and Northern Petroleum are exploring in Sussex and Hampshire, among others.

Europa, which along with Egdon is trying to secure a permit to drill in the woodlands of Surrey for a deposit of possibly 20 million barrels, says onshore wells cost about $2.5 million (1.5 million pounds) to dig, with lifting costs between $10 and $20 a barrel.

Europa, Egdon and Star Energy, owned by Malaysia's Petronas, say production breaks even at about $25-30 a barrel. If oil prices fall, onshore wells are easy to mothball and reopen once prices rise, they say. 

"If you're drilling a well in the North Sea it's going to cost you probably $10 million minimum. We can drill a well onshore in the UK for a fraction of that cost" said Roland Wessel, CEO of StarEnergy, which has fields in Surrey and Hampshire.

"The operating costs are much lower" he told Reuters. "Even though the production is relatively small by North Sea standards, it's still going to be quite economically viable."

Providence reported a pretax loss of 50 million euros last year according to Reuters data, while Egdon did not turn a profit between 2004 and 2008. Both Europa and Northern have remained profitable, with Northern earning a pretax profit of 11.6 million euros in 2008.

The companies say ready access to seismic data also helps keep costs reined in.

But although the firms are optimistic, not all analysts are convinced onshore exploration will be profitable.

"If companies are making it hinged on the financial or tax change, then it's going to be very marginal and risky" said an analyst, who declined to be named.

"If you need those kind of stimuli to make the thing work, you've got a small amount of volume and a large amount of cost."

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