We need a clear signal that the North Sea is open for business.
Oil & Gas UK is clear that fundamental changes are needed, both in the way the industry is taxed and regulated, if the UK is to maximise economic recovery from the UK Continental Shelf (UKCS).
In this opinion, we are not alone.
While capital expenditure last year was at an all-time high, our costs continue to rise, production has fallen in recent years – particularly in some of the oldest fields in the North Sea which are taxed at rates of up to 81%, and exploration remains in crisis.
At our Annual Conference last month, we called for radical improvement in regulation, in taxation and in the way we conduct our operations.
As our chief executive Malcolm Webb said at that event, the penalty for indecision will be permanent loss of indigenous oil and gas resource and the jobs, the taxes and the security of energy supply which that yet-to-be recovered oil and gas can provide.
The recent fall in exploration in the North Sea is, I believe, the most pressing challenge we face.
Earlier this year, we were pleased there was such a strong response to the Department of Energy and Climate Change (DECC)’s licensing round, with 173 applications for 370 blocks.
However, we noted then that only 15 exploration wells drilled in 2013 compared to 44 in 2008. A dismal performance.
The picture is not getting any brighter – latest figures released by DECC detail the number of wells drilled on the UKCS show that there have been eight exploration wells drilled over the first half of the year compared to 10 over the same period last year.
What’s more, a total of only 12 exploration and appraisal wells have been drilled during the first half of this year, compared with 27 drilled over the same period in 2013.
We are working closely with DECC to improve access to data and encourage shared learning, however, greater change is needed.
Oil & Gas UK, the UK’s leading trade association for the offshore oil and gas industry, hopes the implementation of the Wood Review, which received a formal response from the Government earlier this month; and the establishment of a simpler, more competitive, fiscal regime, with a lighter tax burden, through the consultation announced by HM Treasury last month, July 14, will be instrumental in turning this situation around.
The creation of the Oil and Gas Authority (OGA) will, we hope, bring with it a fresh look at the challenges facing our industry and the Fiscal Review must address some of the problems currently holding back exploration and appraisal activity in the UK.
The current fiscal regime has become increasingly complicated and unpredictable with high tax rates combined with a multiplicity of allowances.
HM Treasury’s formal consultation into the future of the UK offshore oil and gas tax regime will hopefully send a strong signal to investors that the tax burden is reducing.
Recently, we welcomed the announcement that the Government has published a consultation on a new cluster area allowance to support investment in ultra-high pressure, high temperature oil and gas fields.
I’d like to take this opportunity to renew our call to Government – we must work closely together to develop a simple allowance; the complexity of the current solution could lead to the wrong outcome, particularly if we are seeking to extend the allowance more widely.
Hopefully, this one allowance can be assessed in the wider context of the entire fiscal regime – a comprehensive review is essential if we are to build on Sir Ian Wood’s recommendations to maximise economic recovery and deliver the full potential of the UKCS.
Mike Tholen is commercial and economics director and Oil & Gas UK