North Sea oil and gas companies made the lowest profits in nearly five years during the first three months of this year, according to new figures from the UK Government.
The Office for National Statistics (ONS) said the rate of profit at firms exploring for and extracting oil and gas sank to 27.6% in the first quarter of 2014, down from 31.1% in the last three months of 2013 and its lowest since the second quarter of 2009.
Profits from North Sea oil have been a big source of tax revenue for the Treasury, but the cost of extracting diminishing reserves has increased in recent years, and is one factor widely blamed for the country’s weak productivity.
Production has fallen by 38% in the last three years, resulting in £6billion less in tax receipts, while a decline in exploration led to the equivalent of less than 50million barrels of oil being discovered last year.
“Activity in the oil and gas extraction sector increased by 0.8 percent in Q1. However the industry has been in long term decline, contracting in every year since 2002,” the ONS said.
It added that profits in the sector were closely linked to oil prices.
Oil prices in dollars were little changed in the first three months of 2014 compared to the previous quarter, although sterling’s strength against the dollar would have reduced the sterling price of a barrel of oil.
The UK’s top oil bosses have been pleading with ministers for a simple and predictable tax regime to help boost production.
Chancellor George Osborne is currently reviewing the entire North Sea fiscal structure.
The Wood Review is also expected the breathe new life into the sector in the coming years.
Industry veteran Sir Ian Wood believes at least 4billion extra barrels of oil could be produced from the North Sea if government, industry and regulators work together to maximise the UK’s reserves – boosting the economy by up to £200billion.
There was better news in the ONS report from other parts of the economy, where corporate profitability picked up, rising to a net rate of return of 11.3%, above average for the past five years.
“The recent overall improvement in corporate profitability in the first quarter supports hopes that companies will continue to invest at a decent rate over the coming months, which is critical for prolonged healthy, balanced growth,” said Howard Archer, chief UK economist at IHS Global Insight.
“Sustained strong business investment is also important to lifting UK productivity which remains a source of concern,” he added.
Profitability in the services sector rose to 15.0% from 14.4%, while manufacturers’ profitability fell to 9.3% from 11.8%.
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