The UK Government’s decision to widen the scope of the investment allowance in the Summer Budget is a positive measure, and something which the Scottish Government has previously called for – however, this Budget represents a missed opportunity for the North Sea.
As the First Minister outlined at the Oil & Gas UK Conference last month in Aberdeen, and as I reiterated in my letter to the Chancellor, further action is still required to incentivise exploration, promote stability across the industry and boost investor confidence.
The Scottish Government’s latest summary of the oil and gas sector identified the North Sea as the largest oil producer in the EU by a considerable margin and the second largest gas producer in the EU after the Netherlands, supporting around 200,000 jobs and with a supply chain with international sales of more than £11billion.
Furthermore, over the long-term, there remain considerable opportunities to extend production, with up to 23 billion recoverable barrels of oil equivalent remaining in the North Sea.
If this potential is to be realised, much more needs to be done to incentivise exploration. Exploration is at historically low levels. Last year, North Sea exploration reached its lowest level in at least two decades, with only 14 explorations wells drilled, compared to 44 in 2008.
You only need to look to Norway to see the impact that effective stewardship and the right policies can have on exploration, where more than 40 exploration wells were drilled in 2014.
The Johan Sverdrup field in Norwegian waters was discovered as recently as 2010 – in a mature area which had previously been explored without success. The field is estimated to hold approximately two billion barrels of oil – in contrast, this is 40 times more than the 50 million barrels of commercial reserves discovered in the UK Continental Shelf in 2014.
That is why, in January, the Scottish Government outlined the case for exploration tax credits, and subsequently in February proposed a more ambitious investment allowance.
While the investment allowance has been expanded to include new types of expenditure, the UK Government has missed an opportunity to use this allowance to properly support exploration; and the UK Government has failed in its previous commitment to consider options to support exploration through the tax system. This is why the Scottish Government called on the Chancellor to launch a consultation, and I reiterate the need for urgent action.
The UK Government also needs to do more to improve the reputation of the North Sea as a globally attractive investment location, providing certainty for investors.
The Scottish Government called on the UK Government to make a firm commitment for no tax increases during this parliament to provide the stability and predictability the basin requires – another measure the Chancellor has not delivered. Working in partnership with industry is far more effective than operating in isolation, and will ensure that we avoid situations like the Chancellor’s sudden tax hike in 2011, which damaged the view of the UK fiscal regime in boardrooms around the world
The Scottish Government remains committed to working with industry, the new regulator, and the UK Government to ensure the appropriate fiscal and regulatory regimes are in place to support the long-term success of the North Sea.
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