Throughout the twists and turns of 2008 – and, let’s face it, there have been many – the UK oil&gas industry has continually sought to secure a constructive partnership with the Government department responsible for energy.
Such a partnership is necessary to enable the industry to play its vital part in providing a safe, secure and sustainable energy supply for the UK, and looking back at 2008, there were, I believe, two events which might come to be regarded in time as seminal moments in the journey towards maximising recovery of Britain’s oil&gas – though each also comes with a note of caution.
First, we saw the creation of the Department of Energy and Climate Change (DECC). Oil & Gas UK strongly supports a holistic approach to the twin challenges of securing the nation’s energy supply and reducing greenhouse-gas emissions. We therefore hope that the new department will be the catalyst for a mature and balanced debate on the relationship between these objectives.
For example, an immediate issue arises with the EU’s proposals regarding phase three of the Emissions Trading Scheme. As currently formulated, these put about 1billion barrels of UK oil&gas production in jeopardy and for negligible – and I mean negligible – environmental benefit. This will be a significant test of the Government’s ability to deliver the right energy policy for Britain and avoid succumbing to populist and damaging environmental tokenism of the very worst kind.
However, if it is to be truly effective, DECC must be properly resourced. I have long believed that the oil&gas team within Government suffers from a chronic lack of resource. So I was very interested by a recent report in the Guardian comparing the 2007 spend of UK Government departments. I noted, for example, that the Department for Culture, Media and Sport spent a total of £6.6billion, and that Defra spent £1.7billion on environmental protection, £500million on “departmental operations”, £300million on animal health and welfare and £100million on the Forestry Commission.
However, turning to BERR (the department then responsible for energy), I was frankly dismayed to see that Government spend on “energy supply and clean energy” was a meagre £68million.
That’s less than 0.01% of the total spend on a matter which, according to the then Secretary of State, John Hutton, is a “defining issue for the country”.
Now it so happens that UK oil&gas companies currently pay the Government a total of £60million a year in annual rentals for their offshore production licences. So it seems that these rental payments effectively finance almost all Government spending on energy supply and clean energy policy.
To my mind, this amounts to a serious decoupling of the political rhetoric from the actual delivery of a serious and effective energy policy for the UK.
Furthermore, am I wrong in believing that the money which the oil companies pay in rent to the Government for their licences should properly be spent on keeping the oil&gas licensing and regulatory scheme in good order?
It is very clearly not being spent on that today. I doubt that a 20th of it is.
The second encouraging event in 2008 was the Chancellor’s recognition in his Pre-Budget Report (PBR) that it is time to adjust the tax regime and make it more appropriate for the now mature UK oil&gas basin.
In fact, in 2008, the Chancellor announced several small changes that help provide greater certainty and consistency for investors, and his agreement in December to put incentives in place to increase production from marginal oil fields was a particularly positive move.
However, the focus must now be on ensuring that any measures, such as the value allowance announced in the PBR, are big enough to make a material difference to the economics of UK projects, predictable, simple to operate and implemented with some urgency.
There is absolutely no time to be lost. The current decline in investment and production must be slowed as soon as possible.
One lesson I draw from the banking crisis is that strong, intelligent and purposeful regulation is crucial in delivering an effective and productive partnership between industry and Government.
The UK oil&gas industry is committed to strengthening its relationship with the Government and we look forward to the first meeting with the new Secretary of State, Ed Miliband, in January and at the subsequent PILOT (the industry-Government forum) meeting set for February.
2009 will be a challenging year for every part of British industry and, while the nation is blessed by having a particularly strong indigenous oil&gas industry, it will not be immune from the effects of the recession.
For the sake of UK energy security and our general economic wellbeing, it is vital that this country’s oil&gas industry is given proper recognition and purposeful support and regulation from a well resourced DECC.
Weakened regulators brought us the credit crunch. We must learn from that. We must avoid an energy crunch.
Malcolm Webb is chief executive of Oil & Gas UK