UK Chancellor George Osborne has announced a package of measures to support the North Sea oil and gas industry, which he said was in “pressing danger” from low oil prices.
Presenting the UK’s 2015 Budget, Osborne (pictured) said: “It’s clear to me the fall in the oil price poses a pressing danger to the future of our North Sea industry unless we take bold and immediate action and I take that action today.
“First, from the start of next month I’m introducing a single simple and generous tax allowance to stimulate investment at all stages of the industry.
“Second, the government will invest in new seismic surveys in under explored areas of the UK Continental Shelf [with investment totalling £20 million in 2015-16].
“Third, from next year the petroleum revenue tax will be cut from 50% to 35% to support continued production from older fields.
“Fourth, I’m cutting the supplementary charge from 30% to 20%, and back dating it to the beginning of January. It amounts to £1.3 billion of support for that vital industry in the North Sea
“The OBR expects it will boost production by 15% by the end of the decade,” he concluded.
The 10% cut in North Sea corporation tax and the reduction of the petroleum revenue tax by 15% from next year now means headline North Sea marginal rates range between 50-67.5%, compared to 62-81% prior to last year's Autumn (pre-Budget) Statement.
Osborne’s measures were broadly welcomed by the industry, with some saying they did not go far enough. Oil & Gas UK estimated that, in the near-term alone, the new measures could incentivize an additional £4 billion of capital investment, enabling the development of 500 MMboe, which at today’s prices are worth £20 billion.
Malcolm Webb, CEO of industry body Oil & Gas UK, said: “Today’s announcement lays the foundations for the regeneration of the UK North Sea. The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness.”
“These measures send exactly the right signal to investors. They properly reflect the needs of this maturing oil and gas province and will allow the UK to compete internationally for investment.
“We also welcome the Government’s support for exploration announced today. With exploration drilling having collapsed to levels last seen in the 1970s, the announcement of £20 million for the newly formed Oil and Gas Authority to commission seismic and other surveys on the UK continental shelf (UKCS) is a very positive step.
“Along with substantial industry efforts to address its high cost base and the regulatory changes now in train to provide more robust stewardship, the foresight shown by the Chancellor in introducing these measures, will, we believe pay real long-term dividends for the UK economy.”
However, Colin Welsh, CEO at Simmonds & Company International, said: "Today's measures are akin to a patient requiring a massive shot of adrenaline but instead being handed an oxygen mask. What we see is a definite move in the right direction but the combined measures do not amount to a game changer for the UKCS."
Welsh said that simplifying the tax regime and reducing the tax burden on the sector were welcome moves but that the sector still faced higher levels of taxation compared to other UK industries and remained less attractive when compared to fiscal regimes for oil and gas in competing international locations. However, he said the move at least showed the government recognized change was needed and that the measure, coupled with the new industry regulator, the Oil and Gas Authority, and an anticipated recovery in crude prices did give greater cause for optimism.
"There is a degree of confidence that crude prices will recover in the latter part of 2015 and hopefully the new Oil & Gas Authority, which has been established to implement the recommendations of the Wood Review, can build on these measures and a price recovery to ensure that we end up with an industry with a good chance of maximising the potential of the remaining resources in the UKCS," said Welsh.
Mhairidh Evans, UK Upstream Senior Research Analyst for Wood Mackenzie, said: "While the announcement is beneficial for onstream fields and already-discovered resources, there will be disappointment that more hasn't been done to revive exploration. The effect of the Investment Allowance is unlikely to extend to opening new plays, and £20 million will be used up quickly on surveys in frontier areas. Further work will still be required to address the long-term challenges of the UK's high-cost operating environment and dry project pipeline."
Calls for a reduction and simplification of the tax regime have been made by the industry even before oil prices fell from US$100 to $50.
Last year, a fiscal review of the North Sea tax regime was carried out following recommendations by Sir Ian Wood in his Maximizing Economic Recovery report, known as the Wood Review, which was commissioned late 2013, when concerns about the future of the North Sea were already strong.
The industry has seen falling production rates, record low exploration levels and more recently low levels of production efficiency have become a concern.
The industry has acknowleged it needs a level of “self help.” Andy Samuel, CEO of the newly created Oil and Gas Authority - the new UKCS regulator, created on the back of the Wood Review, said leadership, further actions from the Wood Review and efforts to address costs and efficiency would also be needed.
Jon Fitzpatrick, Senior Managing Director and Head of Oil & Gas EMEA at Macquarie Capital and President of the Scottish Oil Club, was sanguine about the new measures. He said, while welcome, they "will likely only benefit the handful of tax-paying North Sea producers and will not address the much larger, structural issues facing the North Sea oil and gas industry."
“The sharp and aggressive fall in the oil price was unexpected and while we anticipate the price rising in the long-term, it is impossible to predict when that may be. Incumbent management teams need to address many issues in the shorter-term, cutting costs on existing producing assets and securing ongoing funding for North Sea development projects. There are a vast number of projects that are unfunded and unsustainable at current oil prices and many companies may not stay in the basin or business long enough to see the dawn of the oil price rising again. While in the interim, some critical North Sea infrastructure will likely be decommissioned leaving existing discovered resources at risk of never being developed.
“To address the underlying issues and attract substantive third party investment, the industry and UK government need to work more closely to encourage a more aggressive drilling and production programme and protect employment and economic opportunities over the longer term. The Treasury only need look across the Continental Shelf border for one such idea: rebates on exploration drilling.”
Subscribe
