By Martin Kelly
Investment and development in the North Sea is being hampered by a fiscal regime that is increasingly viewed as overly complex, burdensome and uncompetitive, industry body Oil and Gas UK has said in a newly published report.
The body has warned that unless there is a major overhaul of taxation and incentives then the sector faces major challenges if it is to develop new fields and extract the tens of billions of barrels of oil it says still remains in the North Sea.
Calling for “radical change and sustained improvement”, Oil and Gas Chief Executive Malcolm Webb added: “We need to implement these changes without delay. The clock is ticking.”
The report highlighted the importance of the Oil and Gas sector to the UK with thousands of companies involved in the supply chain that sees technology, skills and services exported to more than one hundred countries.
There were signs that the sector remains in good health, with record levels of investment last year of £14.4bn. High levels of investment are expected to be maintained up to 2015, with “an abundance of resources” still to be discovered.
Production was better than expected in 2013, but over the last three years has still declined by over one third. However it is expected to pick up in 2014. Production efficiency is also expected to improve in 2014, following a decade of decline.
Operators are more positive about 2014 than last year with more than eighty per cent saying they expect improvement – up on 2013 when only fifty per cent expressed optimism. By 2018 it is expected that forty per cent of production will come from new field development.
Oil prices averaged $109 a barrel, similar to 2012 and gas prices rose 13%.
However Malcolm Webb warned that the future of the sector could be put at risk if regulation and taxation were not addressed: “Without greatly improved exploration success, a significant improvement in productivity, and the urgent implementation of a new and more dynamic approach to regulation and taxation, this potential will not be properly realised.”
The head of the industry body pointed to the slump that hit the sector in 2011 after UK Chancellor George Osborne unexpectedly hit the sector with a twelve per cent tax hike that hit investment and caused exploration to slump.
Warning that exploration was facing its biggest challenge in 50 years, Mr Webb added: “Exploration slumped in 2011 and has yet to recover. In 2013, only 15 exploration wells were drilled discovering just 80 million barrels. Unfortunately, 2012 was equally poor with 2011 very disappointing. Taken together, the last three years have seen the lowest rate of exploration activity in the history of the UKCS.”
The latest report from Oil and Gas UK also pointed to increases in production costs which rose by 15.5% in 2013. It warned if action is not taken then by 2016/17 investment could be half that of last year.
The report from Oil and Gas followed a similar report from former oil tycoon Sir Ian Wood who has called for the urgent setting up of a new regulatory body to replace the under resourced Department of Energy and Climate Change.
Sir Ian has estimated that, through the coordination of oil companies, the Government and the regulator to improve efficiencies in the sector, an extra 3-4 billion barrels of oil could be extracted which would generate £200bn for the economy.
Responding to Sir Ian’s review, Mr Webb said: “We need to implement these changes without delay. The clock is ticking.”
Commenting in response to the report from Oil and Gas UK, the Scottish Energy Minister Fergus Ewing said:
“This Activity Survey demonstrates the range of opportunities and challenges facing the North Sea oil and gas industry at this time. On one hand we currently experiencing an investment boom with an estimated £14.4 billion of capital investment in 2013, almost double 2010 levels. However at the same time exploration activity in the North Sea remains below trend.
“I strongly agree with the conclusions of the Activity Survey that while the North Sea still holds significant potential – maximising the return from our oil and gas resources will require the appropriate business conditions for investment in exploration, appraisal and development. The good news is that we now have Sir Ian Wood’s key recommendations on how to take the regulation of the industry forward. These should be implemented as soon as possible.
“To encourage the investment, exploration and innovation required to maximise the return from the north sea, it is important that industry has confidence that government can provide the certainty it requires.
“That is why the Scottish Government appointed an Independent Expert Commission on Oil and Gas in September 2013, chaired by Melfort Campbell, who will report in the Spring. The Commission will make specific proposals in relation to the North Sea fiscal regime with a view to providing long term stability and predictability for the industry.”
Scottish Secretary Alistair Carmichael said: “The UK government is committed to doing all it can to ensure the oil and gas sector has all the support it needs.
“While capital investment remains at near record levels, this survey shows that this key sector faces real challenges around production and exploration.
“That is why we commissioned the Wood Review which was published earlier this week and that is why we are taking forward all its recommendations.”
The issue of North Sea Oil has dominated news in recent days with the both the Scottish and UK Cabinet’s visiting the North East on Monday.
UK Prime Minister David Cameron has claimed an independent Scotland would not be able to provide security to the sector, which he claimed required the “strong shoulders” of the UK in order to flourish.
However the Scottish Government has accused successive Westminster Governments of mishandling the resource for forty years and has pledged to set up an oil fund in order to invest profits from the sector. The nationalists have pointed to Norway’s oil fund which is now worth over £470bn and generates more from annual investments than the country’s oil sector generates.
Read the full report from Oil and Gas here: