Gas Prices To Go Up 25pc Due To Extra Oil Tax

Extra Oil Tax Cuts Down Profits of Oil and Gas Companies – During the 2011 Budget pronouncement, Chancellor George Osborne announced that the supplementary charge tax on UK oil and gas production was to be increased from 20pc to 32pc. Up until now oil and gas companies operating in the North Sea were rather quiet about the tax surge but have recently made public that their profits were slashed and energy and gas prices will rise.

The tax increase brought even more insecurity to the unstable UK energy industry. Big suppliers like British Gas owner Centrica, have already warned it may partially shut the UK’s biggest gas field as a result of the tax.

Last Wednesday, 4th of May, CEO’s of Britain’s largest oil and gas suppliers tried to persuade the Government to abandon a £10bn tax grab on North Sea energy companies, amid warnings the levy will “utterly destroy” the industry.

Speaking to the government’s cross-party Energy and Climate Change Select Committee industry representatives threatened that 30,000 jobs are at risk due to the uncertainty raised by the windfall tax.

The Energy Minister, Chris Hune and Justine Greening, Economic Secretary at the Treasury who were also at the hearing stated that the effect on jobs is pure speculation, because the impact on investment was not yet known

According to Greening, George Osborne used the independent Office of Budget Responsibility (OBR) analysis to calculate the tax and concluded that the effect in investment will be minor.

Writing for the Telegraph, Andrew Lilico, Economist with Europe Economics, and a member of the Shadow Monetary Policy Committee said that claims by oil and gas companies that it is going to shut down the North Sea are just silly.

First, let’s remember that Petroleum Revenue Taxation (PRT), including the “supplementary charge” on corporation tax that Osborne raised, isn’t like taxes on widgets or socks or ice cream. It isn’t, as with most taxes, a matter of the government confiscating a portion of someone’s property to use for government purposes (worthy or not). No – it’s the Queen’s oil, not the oil company’s. PRT is simply the way that the oil company pays the Crown for the right to take away and sell that oil. It’s an alternative to a royalty, and can be thought of in much the same way. – Andrew Lilico

It is widely known that tax increases reduces incentives to invest and cut down profit margins from companies affected by the scheme. One way or another, companies find a way to pass this to the end customer in order to minimise the effects on their profit margin.

Centrica has already stated that wholesale gas price for delivery next winter has gone up 25pc because of the jump in commodity prices but has not yet been passed on to customers.

What baffles me about all this is that over the past two year when Brent crude oil prices surged from $80 to $125 a barrel and the profit of these Oil and Gas companies nearly doubled, they kept quiet and even managed to increase oil and gas prices due to one reason or another.

Let’s not forget that the majority of the oil and gas being explored today in the North Sea is fruit of investment planning made a little over a decade ago when oil prices were around $10 per barrel. So to say that a 32pc supplementary charge will shut down the North Sea with Oil prices at $100 per barrel is frankly absurd.

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Energy Market Report May 2011

Our monthly analysis of the UK gas and power markets is now available on line for the month of May 2011. The service is intended to keep you up to date with all the major news in Europe’s gas and power markets. It is also designed to keep power executives focused on market activity in an easy to digest format.

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IEA and IMF Announcements Pulled Oil Prices Down

At the start of the session on Monday Brent crude oil was being traded above $127 per barrel and dipped below $125.50 later in the same session, after Saudi Arabia assured it can pump more oil if needed and hopes of a peace settlement in Libya. On Tuesday prices continued to drop after announcement of the IEA and the IMF that crude prices above the $100 are starting to hurt global economy.

The International Energy Agency report showed that high prices are already starting to dent oil demand while the IMF Economic Outlook predicted that US and Japan economies will expand at a slower pace than previously predicted. As both countries are the first and third largest oil consumers the report had a direct impact in oil prices that slid as much as $4 from Monday to Tuesday.

At the time of writing Brent Crude oil prices were being traded at $123.56 after falling as much as $2.01, or 1.6 %, to $121.97 a barrel on the ICE Futures Europe exchange in London.

Falling oil prices dragged UK gas prices with it and Winter 2011/12 gas eased trading at 73.50 pence per therm and despite a disruption in supply from Norway where a gas field was shut down due to a gas leak, spot gas prices also backed a little and where trade at 59.00 pence per therm thanks to strong LNG supply.

May gas contracts prices also registered a slightly reduction and were traded at 61.30 pence per therm down 0.10 pence while prices for the third quarter fell nearly half a penny to 64.30 pence.

Despite a secured line of LNG tankers already on its way to Britain gas brokers are concerned LNG terminals won’t be able to compensate further supply disruptions.

Backed by lower gas prices, OTC (over-the-counter) energy prices also fell with the MWh being sold at 50.90 pounds, 85p lower than previous sessions. The restart and reintegration to the grid of Hartlepool 1 nuclear reactor on Monday also influenced lower energy prices.

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Brent Crude Hits Highest Levels since Financial Crisis

Brent crude oil prices hit a 2 1/2 year high and firmed at $121.06 yesterday. Concerns of a disruption in supply due to the unrests in the Middle East and the lowest US unemployment rate in two years were the major factors for this surge in oil prices.  Last time Brent crude oil prices traded above the $120 mark was back in September 2008, right in the middle of the financial crisis. According to some analysts we have reached a “danger point” and if oil prices continue to rise global economy could suffer an inflationary shock putting global growth to a halt.

Estimates from the International Monetary Fund suggest that every $10 increase on oil prices shaves 0.2pc off world growth. Before the turmoil started in the Middle East Brent crude oil was being traded at around $98 to $100 a barrel, so with prices now at the $120 mark we can conclude that global growth will retract 4pc, based on the IMF estimates.

Over the past few days’ oil prices surged from $115 to $120. Market analysts stated that such increase was a “cumulative impact” of weeks of unrests in the Middle East, especially with military action in Libya showing no signs of an easy resolution.

Speaking to The Telegraph Paul Horsnell, head of commodities research at Barclays Capital, said:

“Oil at $120 is a psychological level and it looks like it could be a trigger number, with markets suspecting something on the supply side from Saudi Arabia or OPEC. Spare capacity is becoming more limited and there is concern about the next supply outage.”

Paul Horsnell wasn’t the only analyst questioned by The Telegraph over the surge in oil prices. In the article “Oil rises above $120: what the analysts are saying” renowned market analysts explained why Brent crude oil prices peaked.

What affects will higher Brent crude Oil Prices have in the UK economy?

So it has already doubled the Monetary Policy Committee’s 2pc target at 4pc as climbing oil prices could accelerate inflation. The Office of Budget Responsibility has already estimated an increase of 0.5 percentage points in inflation this year due to the increase in oil prices since November 2010.

Not to mention other commodities that are directly and indirectly tied to crude like energy and gas. Higher oil prices means higher energy and gas prices.

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Energy Market Report April 2011

Our monthly analysis of the UK gas and power markets is now available on line for the month of April 2011. The service is intended to keep you up to date with all the major news in Europe’s gas and power markets. It is also designed to keep power executives focused on market activity in an easy to digest format.

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Should Britain Turn its Back on Nuclear?

The catastrophic events in Japan that led to Fukushima’s nuclear crisis made the world review their concepts about nuclear energy generation. What once was seen as an effective way to generate carbon free electricity is now being questioned about its safety that will sure comprise its economical viability.

What happened at Fukushima’s nuclear power plant caused deep wounds on the nuclear industry, forcing governments in every corner of the globe to review their nuclear development policies.

As countries around the globe start to decarbonise their economies, nuclear power is seen universally as a vital and cost effective carbon free energy generating resource. But new safety policies and other costs for new and existing nuclear power plants could turn nuclear power less economic or even uneconomic.

The nuclear industry has a strong safety record and there is no reason to believe that this cannot be maintained into the future but events in Japan have changed these parameters. Although we don’t have a detailed report of what happened at Fukushima nuclear power plant further improvements on the current high safety levels will sure be implemented and required by new nuclear power plants.

This leads us to the question: “Is it safe for Britain to go on building new nuclear plants?”

Writing to the telegraph Lord Hutton of Furness former secretary of state for Business, Enterprise and Regulatory Reform, 2007-8, answered this question with an emphatic “YES” stating:

“Safety must, of course, always be at the heart of the case for nuclear energy, and regulators must make this their top priority. In 2008, when I had responsibility for energy policy, the safety case was fundamental to my decision to sanction a new generation of nuclear power stations for Britain. I have every confidence that this will be the same approach taken by ministers today. Modern nuclear technologies have multi-layered safety systems in place that offer a huge improvement on the older power plants.”

With ageing power plants due to close in coming years, time is running out for Britain and nuclear power seems like the most probable solution to not only to keep the “lights on” but also to cut down carbon emissions.

If Britain turns its back on nuclear the Government would be limited to very few energy generating resources. Renewables would be one of them, for the delight of the energy secretary Chris Hune. The second option would be gas as it is unlikely that the Government would sanction a new coal-fired power plant.

Meanwhile one thing is for sure the nuclear crisis in Japan will result in rising business gas prices and consequently higher business energy prices as LNG cargoes are diverted to the Far East to fill the gap left by the Fukushima nuclear power plant.

To sum things up I leave you with the question: “Should Britain Turn its Back on Nuclear?” – Share your thoughts and opinions in our comments section.

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Japan’s Disaster Impacts on the UK Energy Market

As uncertain to the future of the UK energy market, Japan’s disaster has caused even more uncertainties. Should the government stick with the nuclear energy programme? Or was what happened at Fukushima’s nuclear plant a warning that as efficient as nuclear might be, safety comes first?

Once again energy market specialists are divided into two groups. Those that believe Japan’s nuclear crisis will change global energy markets for good and those that despite knowing the risks of nuclear power plants still think the Government must not divert from its nuclear energy programme.

The events at Fukushima nuclear power station are likely to change national energy policies in nuclear countries and that includes the UK.   China has already suspended new nuclear plant approvals and those that are under construction that do not conform to safety standards must immediately cease construction.

New safety policies and other costs for new and existing nuclear power plants could turn nuclear power less economic or even uneconomic. Nuclear’s loss could be natural gas and renewable’s gain. Although it is very early to say how this will affect the British power sector potential changes should not be downplayed.

Speculative analysis shows that gas could significantly be impacted by long-term policy changes which could lead to higher gas prices.

“With gas-fired power stations normally the marginal source of generation capacity in the UK, this is likely to result in higher electricity prices.” – stated an Energy Broker.

Unfortunately the UK relies on nuclear power stations to replace coal-fired stations that will be switched off over the next decade. Even those who once described nuclear energy as a “tried, tested and failed technology”, are now advocating that Britain needs a more balanced energy strategy, in which nuclear will be crucial.

On Sunday, Chris Hune, the energy secretary, ordered the chief nuclear officer to conduct an immediate review of the safety of Britain’s nuclear power stations.

Mr Hune who once was totally against nuclear power has recently turned into a supporter for new nuclear stations. Right now there are plans for five nuclear plants to be built in the UK over the next decade. Shifting to nuclear is crucial if Britain is to reduce carbon emissions by 80% by 2050.

Despite agreeing that the UK will need to rely on nuclear to “keep the lights on”, Mr Hune still believes the UK can meet its climate change commitments without relying too much on nuclear.

“We can do the 80 per cent reduction in emissions by 2050 without new nuclear, but it will require a big effort on carbon capture and storage and renewables.”

On the other hand, the Conservatives are likely to oppose any move to scale back the nuclear programme. The prime minister said that nuclear should be par of the mix.

I leave you with the questions asked in the beginning of this article – Should the government stick with the nuclear energy programme? Or was what happened at Fukushima’s nuclear plant a warning that as efficient as nuclear might be, safety comes first?

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