There is no doubt that the oil and gas sector is facing challenging times – on-going cost pressures and the fall in oil prices are reducing margins for both operators and supply-chain companies, and it is important that Government does everything it can to support the industry during this period.
I believe that North Sea oil is a fantastic asset for Scotland and will continue to be so be for decades to come.
There are up to 24 billion barrels of oil and gas equivalent remaining, and it is essential that we have stable and proportionate fiscal regime which encourages the investment, innovation and exploration required. This is even more important in light of the recent job losses in the sector.
The UK Budget Statement failed to provide the Oil and Gas industry with the tax measures it both requires and deserves.
The First Minister made clear her commitment to the sector this week, outlining that we are actively discussing these issues with the industry and calling on all parties to unite behind our plea to the UK Government to reduce the tax burden on the sector.
The UK raised the supplementary charge by a staggering 12 per cent in 2011. Three years later, they cut it by two per cent – only undoing one sixth of the previous tax increase.
This disastrous fiscal policy, and the instability the UK Government caused in the industry, is likely to lead to premature COP – cessation of production – of some fields with resultant loss of revenue.
The so called package of new ‘reliefs’ that the UK Government has announced has not been described in detail, and that is where the devil always lies. Suggestions of future tax reductions have no figures and no detailed timetable – without this they cannot be relied on.
Nor was there any mention in the Autumn Statement of the bareboat charter tax- another tax on oil and gas exploration introduced by the UK Government in the past year, just as trade body Oil and Gas UK warned of a slowdown in exploration drilling.
We are already seeing companies pull further investment in the North Sea and deploy capital elsewhere. Because of the inadequate offering from the UK Government, there can be little doubt that this will be followed by other companies, indeed James Edens, Vice President of CNR International has already warned of exactly that development.
What the industry did require was a substantial tax change to complement the industry measures to reduce costs, led by service companies – a process which is far from complete.
Looking at the Treasury predictions of the estimated impact of the tax measure introduced by the Chancellor is revealing. The UK Government estimates that the two per cent reduction in the Supplementary Charge announced at the Autumn Statement will cost on average £60 million each year over the period to 2019-20. Over the five years to 2019-20 as a whole it is estimated to cost £300 million.
Contrast that with the prediction made by Sir Ian Wood in his report to the UK Government, that the potential additional prize from the North Sea over the next two decades was £200 billion – provided the right policies were pursued. This demonstrates the total value generated by additional production could significantly outweigh the reduction in tax revenue. On the back of an 80 per cent tax rate for pre 93 fields this doesn’t seem like a great deal for the industry.
Sir Ian was not given the remit to opine on what tax incentives were required remit, though he did comment that the industry viewed the current tax regime as characterised by instability. It is now clear that the tax package will fall dismally short of what is needed to help protect the supply chain of the industry.
When the UK Government announced their tax measures in 2011 I discovered, in a series of meetings with senior executives of companies around the world, that shocking tax grab damaged confidence in the UK regime – bearing in mind that investment is over a period of twenty to thirty years in new fields , and predictability and stability is prized above all.
The 2014 Autumn Statement was a widely heralded opportunity to redress that damage. It was another opportunity squandered.
The measures are far too little to assist the sector which supports around 450,000 jobs in the UK.
Last summer, the Scottish Government commissioned a report from a group of industry experts, including industry ‘guru’ Professor Alex Kemp of the University of Aberdeen.
This report stated that tax incentives were required to make the North Sea internationally competitive. It set out a range of recommendations for fiscal policy, and was widely praised by the industry.
The Scottish Government has long argued that what the industry requires is a stable predictable fiscal regime, and that substantial tax incentives are needed to achieve the objective of maximising recovery.
Unless the UK acts to bring in further measures, the likelihood is that some fields will cease production early – which of course also damages public finances over the medium to long term.
Of course, the industry in Aberdeen has seen and lived through oil price fluctuations in the past and will do so again.
Whilst no one can be certain of these things, the expectation is that the price will come back. Most independent forecasts expect the price to rise again next year, with OPEC predicting a price of $110 per barrel for the rest of the decade and around $100 in real terms in the long-run. Current prices are nothing new – in 1999 they were around $10 a barrel, and Norway had just started to invest in its oil fund, which is now worth more than £500 billion and is the biggest of its kind in the world.
What was required by the UK was action to protect the supply chain in the next few years and to protect the enormous total value added from the other tax revenues it delivers – Income and Corporation taxes, NIC, rates, as well as highly paid jobs.
It is failing and failing badly on that measure.
I have been the Energy Minister in the Scottish Government over the past three and a half years, and in that relatively short time have seen no less than four UK oil and gas ministers. This lack of continuity is widely viewed as evidence of the UK Government just not “getting” oil and gas – and certainly not the massive contribution it makes to the economy.
Our Oil and Gas Expert Commission report, published in July, stated that the Industry was ‘at a crossroads’. Once again, the UK Government has taken the wrong turning. But it may not be too late – now is the time to act and to ensure that the Investment Allowance is introduced in the 2015 Budget.
This surely can only serve to encourage the much needed investment in the UKCS and sustain the jobs of the thousands of highly skilled jobs that contribute so much towards our society and economy.
Fergus Ewing is the Scottish Government’s Minister for Energy, Enterprise and Tourism