Oil price slump gives China a £2bn UK tax break

Aug 23, 2016

China National Offshore Oil Corporation pays effective tax rate of -18 per cent on North Sea fields

Jeff J Mitchell/Getty Images

Page 1 of 67Oil price slump gives China a £2bn UK tax break

A Chinese company blocked from buying assets in the US will benefit from a UK tax break in excess of £2bn as a result of the oil price slump.

After its buyout of Canadian company Nexen in 2012, China National Offshore Oil Corporation (Cnooc) runs two of the North Sea's biggest oil fields and pumps around ten per cent of total output from the region, says The Times

The company, like China General Nuclear Power (CGN), is owned by China's assets supervision and administration commission, which is under the "direct control" of the state council - Beijing's highest government authority. 

It was revealed last month that CGN is being charged with industrial espionage in the US accused of stealing nuclear secrets. Cnooc itself was blocked from buying a US oil company in 2006 over "national security concerns".

However, no such concerns appear to have been raised about it becoming the largest company operating in the North Sea and as a result, it is benefitting from a range of tax breaks designed to ease pressure on the industry in the face of the two-year oil price trough.

Last year, then chancellor George Osborne cut North Sea taxes on newer fields and the overall tax bill from 50 to 40 per cent, while earnings losses directly related to the oil price slump also generate income tax rebates.

Cnooc paid £2.5bn in tax in 2014, when the oil price peaked in the summer at $115 a barrel. After a fall to less than $50 a barrel last year, the company recorded an overall tax credit of £316m, an effective income tax rate of -18 per cent, it said.

While tax breaks in excess of £2bn will not be paid in a single year, says The Times, they reflect "the total value of the tax cuts to Cnooc now and in the future".

North Sea oil price benchmark Brent crude remains subdued despite recovering from a low of $27 a barrel in February to more than $50 a barrel last week. It dipped again to below $49 this morning as hopes for an output deal next month fade.

Reuters reports more bearish sentiment also follows the news that a ceasefire with militants in Nigeria and the return to pumping of an Iraqi pipeline will boost already high global supply.

Oil price: Is the August rally to $50 'overblown'?

22 August

Doubts are being raised that the latest oil price rally to more than $50 a barrel is sustainable, with analysts telling Reuters the upswing into "bull market" territory is "overblown".

Brent crude rose above $51 at one point late last week, marking a more than 20 per cent advance from a low of less than $42 a barrel last month, which itself signalled a "bear market" fall of more than 20 per cent from a peak in June.

The International benchmark was down one per cent this morning and holding only marginally above $50 a barrel. Some say that level will not be held in the coming days if a largely speculative rally runs out of steam.

At issue is the source of the upward momentum, which is largely based on hints from producers such as Saudi Arabia and Russia that a meeting in Algeria next month will yield a deal to curb oil output.

The problem is the same hints and speculation surrounded a meeting in April and fuelled a rise in the oil price from a 13-year low of around $27 a barrel into the early $50s. The price crashed when a deal failed to materialise.

With tensions between Iran and Saudi Arabia showing no sign of subsiding and production from the Opec cartel rising to a new record, there are few signs things will be different this time. 

"Most analysts do not expect any production cap decision to emerge from that meeting, but in the oil market, this 'no-news' is also affecting prices, which are susceptible to any phrase or comment by officials," oil consultant Irina Slav writes on Oilprice.com.

One of the main reasons the rise on such fragile foundations has been so strong, and volatility in the market so pronounced, is that it caught big investors who had bet on falling prices off guard.

"Short-covering" - unwinding an all-time high "short" position in response to the upward move in prices – has exaggerated the positive swing.

However, some analysts are optimistic and point to figures last week showing that both raw crude and petrol stocks in the US dipped last week as further evidence the market is slowly returning to balance, which could see prices move beyond $50 and towards $60 or above next year.

For these bulls, it will be important to see a continuation of that drawdown when the latest data is released on Wednesday.

Oil price back into bull market territory

19 August

Oil continued its strong rally on Thursday, rising into "bull market" territory and close to a two-month high.

Brent crude, the international oil price benchmark, rose above $51 a barrel at one point during afternoon trading in New York, before paring gains to close a little below that threshold. It was holding at around $50.80 a barrel in London this morning.

Its US counterpart, West Texas Intermediate, was three per cent higher at more than $48 a barrel and remained above that level in early trading in London.

The latest jumps added two to three per cent to the benchmarks compared to Wednesday and left them both around 22 per cent above the low reached earlier this month, says Market Watch.

Both Brent and WTI are now officially in a "bull market" run, sitting near two-month highs immediately on the back of a fall into a "bear market" last month.

Ongoing speculation that the world's largest producers, including the Saudi Arabia-led Opec cartel and Russia, could agree a deal to freeze production next month has helped boost prices.

A deal would encourage investors to believe that a two-year supply glut is coming to an end - something US reserves data this week might also have suggested with a surprise fall in both raw crude and petrol stocks.

However, some analysts remain unconvinced. A previous proposal to cap production collapsed in April and Opec member Iran has hinted it may again hold out as it returns from international sanctions.

"Some believe - or more appropriately, hope - that [Opec] may come up with a plan to support prices at its informal meeting next month, something which we doubt will happen," Fawad Razaqzada, a market analyst at Forex, told Reuters.

Oil prices tops $50 after surprise fall in stocks

18 August

The oil price continued its strong rally into a fifth session and overnight regained the $50 level from which it had retreated at the beginning of last month.

International benchmark Brent crude rose marginally above the threshold on one point during Asian trading – and was still within 20 cents by around 10.30am in the London session today.

US counterpart West Texas Intermediate also rose strongly and was still 0.3 per cent up at above $47 a barrel this morning.

Driving the recent rally is speculation that an informal meeting between Saudi Arabia, Russia and other major producers in Algeria next month could finally yield a deal to cap runaway output.

But last night's upward move came in spite of renewed doubts that a deal will be done, as Reuters reports Saudi Arabia, the world's largest producer, is "sending signals" its August production total will rise again to another all-time high.

Not only would this limit the impact of a cap, it also suggests Riyadh's heart is not in calling off the turf war it has waged with rivals for two years.

"Cooperation hopes should be treated with caution, as this is shaky ground to base a bull rally on," US bank Citi said.

Instead, the latest move higher was driven by official data from the Energy Information Administration that showed a surprise fall in both raw crude and petrol stocks last week, suggesting supply and demand is more in balance.

Either raw crude or petrol stocks have risen in recent weeks, pointing to underwhelming underlying demand.

Here too, however, there is a note of caution from analysts, who say the wider "spread" between the US and international oil price is encouraging overseas investors to draw down US stocks without increasing overall consumption, says Reuters.

Oil price pares gains – but $50 a barrel is 'unavoidable'

17 August

The oil price rose strongly again in New York trading yesterday for the fourth consecutive session before gains were pared overnight.

Brent crude, which sets prices in the North Sea, was down 0.9 per cent this morning in London and was back below the $49 a barrel level it regained just hours earlier.

US counterpart West Texas Intermediate, which sets prices for the light, sweet grades of oil produced across the Atlantic, was down 0.8 per cent to around $46.20 a barrel.

Despite these losses, both benchmarks are still "in sight of six week highs" and close to 20 per cent up for the month already, eroding all of the losses incurred during a difficult July, reports Reuters.

Analysts believe the price will go higher in the short term.

"The 'pain trade' is probably still to the upside. And now we are a dollar away from $50 so it seems almost unavoidable that we’re at least going to take that (level) out," Swedish bank SEB's commodities strategist Bjarne Schieldrop said.

Like others, Schieldrop cited market chatter of a deal to cap output among the world's largest producers, talk which caught big investors who had placed a record bet on falling prices.

"[We] are also resigning to a momentum shift in which our technical indicators are flashing green lights in favour of further crude price rallies of at least a couple of dollars a barrel," Jim Ritterbusch, of Chicago-based oil markets consultancy Ritterbusch & Associates, told Reuters.

The overnight fall was prompted in part by data from the American Petroleum Association that continued the recent trend of showing a build in either raw crude or refined product stocks.

It estimated a drop of 680,000 barrels at the main delivery hub in Oklahoma last week but a massive two million build in petrol stocks, Oilprice.com says.

This continues to suggest weak underlying demand that many fear means the ongoing supply glut is entrenched.

On the other hand, there are those who believe the market is broadly in balance and that the recent dips into the $40s represents a bottom. They suggest prices will trade broadly sideways this year before moving higher in 2017.

Oil price heads for $50 after Russia stokes output deal rumours

16 August

Oil has enjoyed its best three-session gain for four months and the benchmark that sets prices in the North Sea is moving towards $50 a barrel as rumours grow of a deal to curb output.

Brent crude was up 0.5 per cent this morning in London to $48.60 a barrel, the highest it has been since the first week of July.

Its US counterpart, West Texas Intermediate, rose 0.6 per cent to more than $46 a barrel. It has risen ten per cent in three sessions, its best run since April.

The latest move was driven by Russia stoking the rumour mill over a meeting of producer nations in Algeria next month, which the market hopes will lead to a formal production cap to support prices.

"Russian Energy Minister Alexander Novak said his country is consulting with Saudi Arabia and other producers to achieve oil-market stability," reports the Wall Street Journal.

Last week, the Saudi energy minister, Khalid al-Falih, said members of the Opec cartel and other producers would "discuss… any action that may be required to stabilize prices", says Reuters.

With the two largest oil producers in the world both apparently singing from the same sheet, optimism is building that after two years of letting the market run wild, action will now be taken.

However, we've been here before. Russia and Saudi Arabia's positive notes ahead of a meeting in April saw prices jump, but in the end, there was no deal and oil slumped back.

"There appears little incentive for producers to back away from jawboning," Matt Smith, the director of commodity research at ClipperData, said.

"It seems prudent to point out the contrast betwixt actions versus words."

Some, however, think the rally was overdue. Despite rises in raw crude and petrol stocks in recent weeks, the market has come more into balance just as bets on price falls hit a record high.

"The market may have set itself up for a large crude price rally to come as funds will inevitably look to exit [bearish] positions," analysts at Raymond James said.

Page 1 of 67Oil price slump gives China a £2bn UK tax break

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