Oil and gas industry ‘at the edge of a chasm’, warn industry leaders

The Yarmouth-based plant makes parts for the offshore oil and gas industry. Photo: Danny Lawson/PA W

The Yarmouth-based plant makes parts for the offshore oil and gas industry. Photo: Danny Lawson/PA Wire - Credit: PA

Oil and Gas UK has called for urgent tax reform after a new report warned the industry stands 'at the edge of a chasm'.

The organisation's 2016 activity survey found the rate of exploration for new reserves on the UK Continental Shelf (UKCS) is at an all-time low 'with no sign of improving'.

Despite a reduction in operating costs and a rise in oil and gas production, a collapse in investment in new projects has sparked fears for the long-term future of the industry.

Writing in the foreword to the report, chief executive Deirdre Michie said: 'We are an industry at the edge of a chasm.'

A 'significant permanent reduction' in headline tax rates is required across the UKCS to attract investment back into the basin as it enters a phase of 'super maturity', she said.

The report found while production rose by 9.7pc in 2015 to 1.64 million barrels of oil equivalent (boe) per day, revenues fell by 30pc between 2014/15 to £18.1 billion as a result of the oil price crash.

Despite industry action expected to reduce operating costs by 42pc between 2014 and 2016, nearly half (43pc) of UKCS oil fields are likely to operate at a loss this year at the prevailing 30 US dollars (£21) price.

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Less than £1 billion of fresh capital is expected to be approved over the course of 2016, compared to a typical £8 billion per year in the last five years.

Just 13 exploration and 13 appraisal wells were drilled in 2015, with as few as seven to ten exploration wells and six to nine appraisal wells forecast to be drilled this year.

Over the last year, the number of fields expected to cease production between 2015 and 2020 has also risen by a fifth to more than 100.

Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall to around £9 billion this year, resulting in falling demand for goods and services and job losses.

Ms Michie said: 'Together we need to transform the basin into a highly competitive, low-tax, high-activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here.

'The industry currently pays special taxes at a headline rate of 50pc (67.5pc for fields paying PRT (petroleum revenue tax)).

'A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury's 'Driving Investment' plan for fiscal reform.

'This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years.

'Finally, improving the effectiveness of the investment allowance would stimulate activity in the short-term and attract fresh investment.'

A UK Government spokesman said: 'This Government is clear that the broad shoulders of the UK are 100pc behind our oil and gas industry and the thousands of workers and families it supports.

'We have established the Oil and Gas Authority to drive greater collaboration and productivity within industry, and announced a radical £1.3 billion package of tax measures in the March 2015 Budget to ensure the UK Continental Shelf (UKCS) remains an attractive destination for investment and safeguards the future of this vital national asset.

'In January this year, we announced a further package of measures including another £20 million funding for a further round of seismic surveys, and our strategy to maximise economic recovery of the UKCS.

'We look forward to the industry capitalising on this, to deliver efficiencies and make the industry more robust now and for the future.'

A Scottish Government spokesman said: 'The UK Government retains the key economic levers affecting the sector - which is why we have called for urgent action to reduce the overall tax burden in the industry, removal of fiscal barriers to exploration and enhanced oil recovery, improved access to decommissioning tax relief and urgent consideration of non- fiscal support, such as government loan guarantees.

'This survey underlines the scale of the challenges currently facing the industry, but it also highlights the sector's efforts to adapt to a low oil price world, with production forecast to increase again in 2016 and operating costs expected to further reduce.

'The North Sea still holds significant potential but this report highlights that further action is needed to encourage investment. Maximising economic recovery from our oil and gas resources will require the appropriate business conditions for investment in exploration, appraisal and development.

'The Scottish Government will continue to do all that we can to support the sector. It is clear, however, that the UK Government must take urgent action to substantially reduce the headline rate of tax at the March Budget and incentivise exploration. The fiscal regime must not be a barrier to investment and activity in the North Sea.'

Scottish Labour MSP Lewis Macdonald said: 'It's unlikely that the North Sea will ever produce the billions in tax revenues it did at its peak, and government has to recognise its importance to jobs and the economy is much greater than its future role as a source of government tax revenues.

'At the same time, we need to see government and industry working together on sharing risk and extending the life of marginal fields. This is not just about taxation, but also about direct investment in the sector, following the success of seismic exploration by the Oil and Gas Authority.'

Scottish Conservative MSP Alex Johnstone added: 'We believe that there is more that can be done in this area, but the focus also needs to be on working with the industry to deliver greater efficiencies.'