Opinion

Dick Winchester: Oh joy – another North Sea review

QUESTIONABLE: Ed Davey is going to have another review of how to maximise the economic benefits of North Sea oil and gas
Dick Winchester

Ed Davey – UK secretary of state for energy and climate change – has made my day. I was mulling over what to write about for the July issue of Energy but then up popped Ed with the announcement that he’s going to have another review of how to maximise the economic benefits of North Sea oil and gas.

He says he’s “come to the view that the challenges we now face are of sufficient importance that they merit a focused, in-depth review. Such a review has not been conducted since the early 1990s when the challenges faced were very different to those we face now”.

I don’t actually agree with that. Having had another quick read through the Oil and Gas Industry Taskforce report . . . yes, I still have a copy as does Energy’s editor, most of the issues that were looked at in 1999 are very similar to the ones Ed thinks should be looked at now.

Worryingly though, many of the actions arising from the 1999 Taskforce report don’t seem to have had a real impact. In fact, in the case of the establishment of ITF (Industry Technology Facilitator) the effect was highly negative because R&D funding fell.

This was strategically inept because the development of new technology is probably the most effective way of achieving what Davey and indeed we all want in terms of maximising North Sea recovery.

Yet, as Scottish Enterprise pointed out recently, Norway invests 4% of sales in R&D whereas we only invest 0.3%. So whatever the Norwegians are doing needs to be looked at.

But what triggered Davey to set up this new review? The 1999 Task Force was aimed at countering the impact of the late 90s oil price slump although in reality and again, as many analysts anticipated, the oil price actually started recovering within months and hasn’t really looked back since.

Could it be Davey’s chum, chancellor George Osborne wants to know how the Treasury can squeeze more tax revenues out of the North Sea to make up for the collapse in financial services and help the London government pay off more of its ever-increasing debt preferably without it having to make any investment in stuff like technology or – heavens forbid – providing additional tax incentives?

As Davey himself says: “The industry supports 440,000 jobs directly or indirectly and paid £11.2billion in direct taxes in 2011-2012, almost a quarter of all corporation taxes received by the Exchequer”.

Not difficult then to look through the spin and assume that the emphasis of this inquiry is really on trying to sustain tax contributions as close as possible to today’s levels or even – if possible – improve on the current position, preferably achieving such an objective without incurring any additional costs.

Then there’s the Scottish independence issue. This review comes at a time when elements of the unionist political parties are all ganging up to try to convince everyone in Scotland that the oil and gas industry is dying on its feet and in any event the oil price is far too volatile to be relied upon as a steady source of revenue. Most of the rest of the world is still laughing over that one.

However, by proposing this review, Davey has done those that support Scottish independence a huge favour because he’s demonstrating that the industry has a long and valuable future.

So, top marks Ed for at least showing that all that negativity emanating from the “No to independence camp” is indeed just propaganda of the worst type. Oil and gas is obviously worth something after all.

Also worth noting is that Davey’s review comes close on the heels of the first anniversary of the Scottish Government’s energy strategy which looks as if it’s making progress. The Scottish Government welcomed the announcement but they must be scratching their heads as to why now.

In fact, what will this latest review achieve that operators themselves aren’t already doing and indeed what industry steering group Pilot is also already working on? Reading Pilot’s latest minutes it seems that it is indeed covering most of the stuff the industry needs to cover. Of course, this may change now the new Oil and Gas Industry Council is to be formed as part of the UK Government’s new UK Oil & Gas Industrial Strategy.

Apart from causing confusion over who is doing what, the other problem is that this new review won’t actually attempt to deal with issues of real national importance.

For example – it won’t look at how to prevent 70% (£18billion) of all oil/gas sector post-tax profits being remitted overseas or why the UK doesn’t build offshore vessels, own an offshore drilling fleet of substance, or the host of other supply chain failures that the current and successive prior UK governments have never been interested in solving provided the tax revenues keep rolling in.

My suggestion is that the review should concentrate primarily on technology needs, how to properly fund the development of that technology and critically, how to ensure it is commercialised by UK companies.

Back in the 90s, support for SMEs, although never matching our competitors, was much more available than it is now following Westminster’s totally inept management of the banks.

I also believe the decommissioning issue needs revisiting. It’s overblown and an ideal candidate for cost-cutting.

Davey says the review will not make recommendations on taxation. Indeed that’s a no go area. Do not touch.

That’s wrong. Operators should be consulted on potential tax changes to help them increase their exploration effort. After all, they understand the impact of tax better than anyone.

Operators also know how best to extend infrastructure life, collaborate with their peers and get the most out of the fields they are running including the use of enhanced oil recovery techniques. It’s their money remember.

But the review will also look at “the current structure, scale and effectiveness of the Government stewardship regime”. Here, there is probably room for improvement given the mistakes made on previous tax changes. But how much scope is there to do anything meaningful given the anticipated Government Department budget cuts?

Hmmmmm!

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