Today,March 20, is apparently the international day of happiness, inaugurated by the United Nations in 2012! Does the oil and gas sector share that happiness after the end of an eventful week?
The start of the week saw a clarion call from Sir Ian Wood for the Chancellor to act decisively in reforming the North sea fiscal regime. Without decisive action Sir Ian warned of job losses of up to 100, 000 as the industry continues to struggle to come to terms with the oil price slump.
Professor Kemp’s latest economic evaluation of the UK oil and gas sector highlighted that a reduction in supplementary charge, the introduction of a basin-wide investment allowance and a cut in the underlying cost base of 15% would deliver incremental investment of £22bn and additional production of almost 3bn barrels between now and 2050.
Against that background what would the Chancellor do?
Well happily the Chancellor delivered the supplementary charge reduction, the investment allowance and unexpectedly, but equally appropriate, a reduction in the rate of petroleum revenue tax.
Industry was swift to respond to the Budget announcements, generally in a positive fashion.
Sir Ian, and Malcolm Webb on behalf of OGUK, were united in expressing their appreciation that the government had recognised the pressing need for fiscal reform and the changes were described as an “essential lifeline” which provides the “foundation for regeneration” and “rebuilding confidence” in the beleaguered North Sea industry.
Of course not everyone was so welcoming, and some pointed out that more could be done.
But therein lies the rub, surely if the cuts in rate had gone further the UK oil industry may have been setting itself up for a partial reversal in these changes when the oil price recovers.
Quite frankly few things would have a more devastating impact on the international competiveness of the North Sea and its ability to attract capital investment than a further increase in oil and gas taxes at this stage of maturity of the basin. Industry has been making that point for a number of years and it must not be lost in the current pre-occupation with the low oil price.
Make no mistake the changes announced on Wednesday were necessary even at an oil price of $115 and they are an important step towards a lower-taxed, simpler fiscal regime for the long term sustainability of the basin.
So industry will generally be feeling happier today than it was a week ago – but of course still painfully conscious of the efforts that will be necessary to reset the industry’s cost base, improve its efficiency, and properly align itself with the requirements of a mature oil and gas province.
This is the necessary medicine that must be taken if the UK oil and gas sector is to maintain its technical expertise, its £40bn supply chain, and expand the proportion of international exports from that supply chain beyond the current 42% of its turnover.
Another factor that would certainly promote happiness, or at least a sense of optimism after months of gloom, was the view expressed this week by the archetypal oilman and octogenarian, T Boone Pickens.
He confidently predicted that WTI would recover from its 6 year low of $44.30 this week to $70 by the end of the year, and reach $80 or $90 next year.
That assessment was based on a continuation in the falling rig count in the US and the inability of the US industry to maintain production levels as more complex geological plays were developed.
Loren Steffy’s article did highlight that whilst the logic expressed was sound, that the underlying fundamentals are not altered and in time demand will outstrip supply again, the key question is timing.
It would certainly be good to think T Boone, reflecting the wisdom of the years is correct, and the happiness quotient in Aberdeen will soon be recovering. That presupposes happiness is dependent on material well- being ….a discussion for another day.
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