I believe the Budget does provide the essential lifeline from Treasury to enable industry to start rebuilding confidence and investment in the UKCS. Government are to be congratulated for recognising the need for this step change in the fiscal regime as essential to make the UKCS more internationally competitive.
Treasury have delivered on the basin wide investment allowance proposals previously discussed, and recognise that it will be important to get full brownfield scope included in this over time.
The supplementary charge reduction from 30% to 20% combined with the investment allowances undoubtedly improves the viability of a significant number of potential field developments and should get new field investment flowing as the oil price recovers.
Hopefully, it will encourage the operators to keep their engineering teams working during this difficult downturn period to engineer the new field developments.
The PRT reduction, which will take effect next year, is particularly helpful for the older fields and should encourage significant brownfield investment to ensure more optimum recovery from these older fields.
The exploration proposals provide a useful start. The £20m speculative seismic contribution will enable the new Regulator, OGA, to work with industry to develop a speculative seismic programme to provide important new reservoir information on some of the more interesting under explored areas of the UKCS.
All in all, this Budget confirms that Treasury are prepared to step up to their role in the tripartite agreement called for in my Review.
Their fiscal proposals are clearly focused on maximising economic recovery and putting the UKCS back on to an internationally competitive footing. This, along with the much more proactive role of OGA, will be powerful and it is now up to industry to take advantage of the new opportunities and once again establish the UKCS as a successful investment region.
In the short term, the fiscal improvement should give the operators more confidence to continue their commitment during the serious price downturn, minimise the numbers of field decommissionings and shutdowns, and hold their key engineering teams together.
There will undoubtedly be job losses as the industry works its way through a very difficult price reduction, but these should be in the 5,000-10,000 range out of the 380,000 current jobs, and very significantly less than would have occurred under the previous fiscal regime.
In the medium term, it is estimated before taking account of the PRT change, that the package will increase the recoverable reserves by 2050 from 12bn to approx. 15bn barrels. At $100 per barrel, this represents $300bn of economic activity for the UK.
So, in summary, this revised fiscal package should help restore confidence in the UKCS and give the UK a significantly better economic return in the medium term from its offshore reserves.
For more analysis on the budget, click here.
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