For over 20 years I have analysed oil price fluctuations. Why? Well, every country’s economic prospects and people’s jobs, yours and mine, are affected in one way or another by what happens to oil prices.
Life and death decisions, including continuing national sovereignty for some nations, hinge on the price of oil.
The current dramatic and fast 35% fall in oil price could be a pivotal moment in historical events. For example, will the oil revenue dependent Russian economy survive if oil prices stay at around $70 a barrel? If not, what action will Russia take?
In the Autumn Statement, the UK Government announced a number of measures aimed at increasing the competitiveness of the UK Continental Shelf. This included a 2% reduction in the Supplementary Charge to Corporation Tax, new tax allowances to encourage development of complex fields as well as enhanced tax measures for the exploration phase.
But this was the curtain raiser to the main event in Aberdeen, where the Chief Secretary to the Treasury, Danny Alexander MP, presented a more detailed roadmap for the future fiscal approach to the UK oil and gas tax regime.
The reforms to the oil and gas tax regime announced by the Chancellor and Danny Alexander this week are, of course, welcome.
Particularly in light of the Chancellor’s admission that it has been 21 years since the oil and gas industry last received a tax reduction.
However, this announcement only goes a short way towards reversing the unexpected and damaging 12% increase in Supplementary Charge tax introduced by Danny Alexander at the 2011 Budget.
The Treasury’s plan to reform the oil and gas fiscal regime is an interesting and encouraging document, which recognises the importance of the industry, while at the same time acknowledging the need to be more competitive in attracting and promoting capital investment in the UKCS.
It has the hallmarks of collaboration, with the Treasury accepting that they must adjust their thinking as to tax receipts from the UKCS, and it is the first time in recent memory, committed to black and white, that ‘we are all in this together’.
The Treasury does not publish a document of this importance without it having being very carefully vetted.
It looks as if the UK Treasury has a fiscal plan that might work for the UK Continental Shelf and the industry appears broadly receptive.
But there were multiple warnings issued to Treasury chief secretary Danny Alexander in Aberdeen that time is running out and that he must deliver concrete measures by the Government’s Spring Budget.
Indeed, this urgency is made all the more acute by the revelations that Opec swing producer Saudi Arabia is now apparently content to let the oil price drop to around $60 a barrel and that it be a long, rough ride for everyone.
The gathering of industry leaders and media at Oil & Gas UK’s offices to listen to Alexander and Tory colleague Priti Patel (exchequer secretary) was large.
There are three things wrong with the UK Parliament's approach to the oil industry.
Firstly, there is no gratitude whatsoever. Over the last 40 years more than £330,000million has poured into the Westminster Exchequer, around £60,000 per head for every Scot.
Scotland's resources have bankrolled successive Tory and Labour Chancellors.
They present any crumb of a concession as if it were a gift.
Smart thinking oil and gas professionals in the Organisation of the Petroleum Exporting Countries (OPEC) are continuing to pump their easy to reach hydrocarbons for their own long term gain. It is their prerogative in a competitive world marketplace.
This and the vast quantities of shale gas flooding the North American market have combined to shatter the certainty that existed in oil prices.
World renowned entrepreneur and founder of Microsoft Corporation, Bill Gates once said: “Success is a lousy teacher. It seduces smart people into thinking they can't lose.”
Chancellor George Osborne took the floor yesterday for what is the last Autumn Statement before the next general election, and probably the current Government’s final opportunity to impact the economy.
But given the fiscal position the Government finds itself in with the budget deficit remaining high and with tax revenues lower than expected, was the Chancellor able to deliver any December cheer for the oil & gas industry?
Well, we definitely saw a number of positive items. The Government restated its support for both the onshore and offshore oil & gas industries, with a mixture of tax and other incentives such as the allocation of £31m to fund the creation of a world class sub-surface research test centre through the National Environmental Research Council.
We welcome the financial incentives named in yesterday’s Autumn Statement, which demonstrate that the Government has not only recognised the increased volatility of the North Sea oil sector stemming from falling global prices and diminishing reserves, but is taking action.
We are pleased to see that, in line with GE Oil & Gas, this Government regards investment, innovation, collaboration and investment in future talent as the keys to unlocking the North Sea’s remaining potential.
Oil & Gas exploration and extraction in the North Sea has been faced with increased complexity resulting in cost escalations causing delays and even cancellation of some projects; the supplementary charge reduction and ring fence expenditure announcements should have significant impact on freeing some investment.
We watched yesterday's Autumn Statement from the Chancellor George Osborne, with feelings of hope and trepidation.
We understand the economic constraints under which today’s Autumn Statement is delivered and there’s consensus in our offices this afternoon that the immediate reduction of two percentage points in its tax rate is an important first step towards improving the fiscal competitiveness of the UK North Sea – but, without question, more needs to be done.
Oh well, the North Sea is being kept on tenterhooks for a few more hours, with Treasury first secretary Danny Alexander scheduled to deliver the supposed main news today tomorrow.
All chancellor Osborne was prepared to do was trail a few crumbs without even mentioning the North Sea fiscal review, let alone whether it will be the cornerstone of the Alexander delivery, though it of course will be.
Just three measures were mentioned in his Autumn Statement address: “I can tell the house today that we will go ahead with an immediate reduction in the rate of the supplementary charge from 32% to 30%, we will expand the ring-fenced expenditure supplement from six to 10 years and we’re introducing with immediate effect a new cluster area allowance.”
We all need to remember, but often choose to forget, that the oil & gas exploration and production is a highly cyclical business. There have been seven significant price cycles since 1970 and also a few minor ones between times, so yet another should come as no surprise.
The real surprise is that no one ever seems to build the probability into their business planning!
The reasons for the fall in Brent crude prices from $115 in June to below $71 following November’s OPEC meeting are well documented, as is the realisation that Saudi Arabia is now defending market share, rather than a minimum price.
Last month, I wrote about how the drop in the oil price will require operators in the UKCS to consider more carefully how they collaborate with each other.
Operators should equally be considering how a continued period of low oil price will affect their relationships with contractors in the oil and gas supply chain.
The UK Oil and Gas Industrial Strategy published in March 2013 identified the vital contribution of supply chain contractors to the continued development of the UKCS both through working with operators to enhance performance and efficiency and through the development of new technologies.
As the energy sector asks more and more of its industrial assets, especially in the offshore environment, the role played by anti-corrosion products becomes increasingly important.
From topsides installations to biomass storage facilities, the need to protect from corrosion can be found in every corner of the industry, both hydrocarbon and renewable, and must be factored in to every project build.
But how much is really understood about the various options offered and do we overlook the range of benefits of one of the simplest, most cost-effective methods available?
It is worthwhile taking a moment to marvel at the built environment around you – houses, shops, offices, factories, hospitals, roads, railways, airports, cars, aeroplanes and so forth – and to then realise that virtually ALL of this was built using energy from fossil fuels – oil, natural gas and coal.
At the same time fossil fuels provide virtually ALL of the energy that flows through our society, enabling economic activity and the creation of wealth.
Fossil fuels are heavily taxed at every stage of their production and use. The economic activity they enable is taxed as well creating vast revenue streams that pay for education, defence, healthcare, welfare and pensions.
A very recent issue of the trade paper, Renewable Energy News, carried an apocalyptic headline: “Wave and Tidal Staring Into the Abyss”. It is difficult to disagree, at least in the short term.
The gloom was prompted by the demise of two companies. Edinburgh-based Pelamis – which described itself as “the most advanced wave energy company in the world” – went into administration. Then Siemens shut down Marine Current Turbines along with the rest of its ocean power division.
Pelamis and MCT have long been seen as front-runners in their respective technologies. Considerable sums of public money have been ploughed into them. But failure to deliver evidence for potential commercial success has been their undoing.
I don’t particularly like Boris Johnson and I certainly don’t support his politics. I also resent his constant lobbying for London which, incidentally, I don’t really like much either. The museums are great but you can keep the rest of it. I’m a country boy at heart.
However, something Boris Johnson wrote last year I have to say I do agree with completely although I’d prefer you didn’t spread it around too much as it might damage my reputation.
Commenting on what he called the UK’s “sterile debate” over Europe he said that if it culminated in our leaving the EU then it would quickly discover “that most of our problems are not caused by Brussels, but by chronic British short-termism, inadequate management, sloth, low skills and a culture of easy gratification and under-investment”.
We’re mostly aware of the saying “May you live in interesting times”. However, it was not uttered by Chinese philosopher Confucius (551-471 BC); rather it is a 20th Century faux Confucian saying attributed to Frederic R Coudert at the Proceedings of the Academy of Political Science in the US, 1939.
Research reveals that what he actually said was, “May you live in an interesting age”.
While the “interesting times” bit appears obscure as to origin, US President Kennedy used it in a speech in June 1966: “There is a Chinese curse which says ‘May he live in interesting times’.”
This week we ran a video of a rare Porbeagle shark caught on a ROV pilot’s camera in the North Sea and it went viral.
The social share and reach of the story was fantastic but ultimately short lived. Energy Voice was soon asked to take the film, which was uploaded by its creator to the public domain, down because it was “commercially sensitive”.
What’s so sensitive about a shark you might ask?
It seems to me that oil and gas company bosses are in danger of becoming the new “bankers”, taking salaries and bonuses that smack of rank greed.
Helge Lund may be a top flight guy, and I have met him on about three occasions, but that does not get him off the hook.
To remind, a spokesman for BG said the £13.5million part of the overall pay deal, which includes a £1.5million salary, was at the top end of Lund’s potential pay in the job.
The figure is more likely to be around £9million, the “median CEO package for the global oil and gas industry”, he added.
Did Lord Smith even get your Christmas list? What is devo max going to deliver for this industry in Scotland? What did we ask for? Few would deny it would be a good year for a big present. There are limits to what London, let alone Edinburgh, could ever deliver. No surprise the UK will reserve our core tax decisions to London. However if you wanted $100 oil you always needed to speak to Riyadh -about the same population as Scotland, but without such excitement over Smith (or Santa for that matter.)
But don’t let our governments off the hook too quickly. I accept I’m aiming high on this one, (not least with a general election next year) but I think we need some ambition. Try this: are our cousins in the USA smiling because Washington has devolved power to Texas (or even lowered their income taxes, let alone cut global oil supply)? No. They are producing shale gas cheaply. Their government has a regulatory framework that has allowed the safe and successful extraction of shale gas on a massive scale. How about our governments collectively working on that for our Christmas present?
By Professor Alex Russell and Professor Peter Strachan
The recommendations of the Smith Commission on the powers to be devolved to the Scottish parliament have emerged through negotiation by the five major political parties in Scotland. It could not be otherwise.
One of the great drivers in the oil and gas industry today is the continuing skills shortage and the need to address the resulting challenges in order to maximise remaining natural reserves.
The picture painted by Sir Ian Wood’s report on the future of North Sea oil and gas is one of an industry that’s past its peak in terms of production.
Halliburton's takeover of Baker Hughes dominated headline space and rightly so. The move saw one major snap-up another - shrinking the competition pool and sending the office gossip talk into overdrive. Nearly every headline carried the billion dollar figure allotted to the bid. But more than any number are the thousands of people who now have a new employer or will soon be welcoming their once-considered rivals to come on board
