While the independence referendum may have created uncertainty in other sectors, it appears to have had no material impact on the UK oil and gas industry – yet.
By contrast, investment in the UK Continental Shelf (UKCS) is expected to reach a record of £13.5 billion in this past year (2013).
But we are still seeing the effect of earlier fiscal measures which were designed to squeeze more taxation out of the UKCS, which deferred production.
It takes around three years from project approval for the first production from a field to be achieved. However, this only occurs after a declaration of commercial discovery following exploration and appraisal.
Recent positive initiatives by the UK Treasury have contributed to this record investment in the UKCS. These initiatives have been aimed at increasing production in the coming years. In particular, new legislation resulted in the introduction of Decommissioning Relief Deeds, which are essentially a contract between the Government and operators that will guarantee the future access to tax relief for decommissioning costs.
This new legislation is expected to breathe new life into brownfield assets that operators may have otherwise been tempted to shut down. It should also encourage the sale of producing assets and the release of capital for investment. It is unlikely that any successor to the current government will be bold enough to set aside the commitments on the availability of tax reliefs contained in the Decommissioning Relief Deeds.
Another incentive for further investment in the UKCS is the current field allowances regime which includes the extraction of heavy oil. Notable examples of such allowances driving investment in the UKCS include Enquest’s £4 billion investment in its Kraken field interests and Statoil’s similar investment in the Mariner development project.
Increased output from the UKCS will have a positive effect on the UK-based service sector which, because of its extending international reach, is less reliant on the UKCS.
Despite the encouraging investment projects, skills shortages are cited as one of the biggest obstacles to growth. The increasing cost of extracting oil and gas and fluctuating oil prices is also a growing concern. There will always be uncertainties in the cost of production as the day rates on capital equipment fluctuate.
While these external factors are not within the current government’s control, the government can play its part in creating a stable environment by implementing a predictable tax regime. This will continue to encourage long-term investment and allow field investors to forecast future returns.
The apparent lack of reaction to the referendum by the oil and gas sector may stem from the belief that a ‘yes’ vote is unlikely, or that neither Westminster or Holyrood will implement a drastic change to the current tax regime. If politicians require evidence of the fragility of proposed projects in the UKCS, they should consider the recent announcements by Chevron and Statoil that they are delaying major projects on economic grounds.
Concerns have also been expressed about the recent announcements that legislation is set to be introduced in 2014 to close the loop holes that allow employers to escape National Insurance contributions for thousands of offshore workers.
Whichever side of the debate wins the referendum, politicians should remember that their fiscal policies are a major determining factor in the success of the UKCS.
Oil and gas in the ground provides no economic benefit for the nation. We must ensure that the economic environment encourages companies to explore, develop and produce.
Rod Hutchison is a partner at Ledingham Chalmers
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