The Wall Street Journal HEARD ON THE STREET March 16, 2009
The U.K.'s Double Whammy: Banks and Oil
By JAMES HERRON
Already reeling from the banking crisis, the U.K. faces another hit from declining oil revenues.
Tax from North Sea oil and the dividends from U.K.-listed energy giants BP and Royal Dutch Shell are among the few solid revenue streams for both the U.K. Treasury and private pension funds. Yet they are under pressure.
North Sea oil and gas producers are expected to pay 27% of combined U.K. corporation and petroleum tax this fiscal year and 20% in 2010, according to the Treasury. Total corporate-tax receipts in January fell 20% from a year earlier, while the government's liabilities have soared.
Meanwhile, analysts estimate that BP and Shell alone will contribute one-quarter of FTSE-100 dividends in 2009. Most U.K. banks, formerly cash cows for institutional investors, are likely to pay little or no dividend for years. If the oil industry cut payments, too, it could pile the pressure on already underfunded pension funds.
There's little the government can do to stanch the fall in North Sea production and revenues. Smaller oil companies' business models have been hammered by high costs, lower oil prices and a financing drought. Meanwhile, larger operators are diverting capital to promising areas like Angola or Brazil.
Pension trustees can take some comfort from BP's and Shell's promises not to cut dividends this year, but both companies will be paying with borrowed money. Another few years of lower oil prices will mean a tough choice between dividends and new investments.
London's financial-services boom and the oil-price surge were twin engines powering the U.K. economy. The first engine is down; the second is now sputtering.
-- James Herron