Although there are encouraging signs that confidence is beginning to return to the oil and gas industry, the UK Government must do more to ensure its recovery.
I have written to the Chancellor, Philip Hammond to outline the urgent need for constructive discussions on further support for the sector.
This includes calling for help for the oil and gas industry by improving access to decommissioning tax relief, incentivising exploration, and for the UK government to deliver on their commitment to provide loan guarantees to protect critical infrastructure, on which they have made a number of promises, but are yet to take action.
The UK Government has suggested it will establish a panel of industry experts to consider how tax can assist sales of oil and gas fields, helping to keep them productive for longer. It is encouraging that the UK Government has finally listened to the Scottish Government about the failings of the decommissioning tax regime. This is an area where we have repeatedly called for reform and which the UK Government have been slow to react, therefore it is important that this group comes to a swift conclusion and is not simply another talking shop.
The UK Government should also follow Scotland’s lead and fund projects that demonstrate they can improve the capacity of Scottish sites for securing decommissioning, dismantling and disposal contracts.
Thanks to the efforts of the industry and its workforce, the industry is in a stronger position than it has been in recent years.
The 2017 Business Outlook report from Oil and Gas UK highlights that through its collaborative efforts to improve efficiencies and productivity the cost of producing a barrel of oil continues to fall – with unit operating costs halved in the past two years – and production continues to increase.
The industry is now in a better shape to compete for fresh investment in order to maximise economic recovery and secure the 20 billion barrel potential of the North Sea. Brexit, however, remains a source of great uncertainty and in support of industry we continue to argue that, short of EU membership, full membership of the single market is the best outcome not just for Scotland but for the whole of the UK.
While maximising economic recovery remains our key priority, we have called for two actions on decommissioning, which represents a significant economic opportunity in its own right, with £17.6 billion expected to be spent over the next decade alone.
Firstly, it is crucial that the ‘right assets are in the right hands’, particularly when fields are maturing and opportunities exist for companies with a competitive advantage to assume ownership and extend the life of assets. Since the turn of the year corporate deals worth $4 billion have been announced, highlighting the appetite of such companies to invest in the North Sea.
The current structure of the decommissioning tax relief, on the other hand, can place barriers on the transfer of such asset . This will have a particular impact to potential new entrants to the North Sea. The UK Government must improve access to decommissioning tax relief. This would likely be, at worst, cost neutral to the exchequer, and could also extend field life and reduce decommissioning costs.
Scotland has built up an expert supply chain and this expertise and knowledge is already being applied to help secure a significant share of the high value decommissioning work, such as well plugging and abandonment activities.
To build on this and ensure the domestic supply chain has the capacity to secure as much of this work as possible, the Scottish Government has published a Decommissioning Action Plan and recently launched a £5 million Decommissioning Challenge Fund (DCF) to identify key developments for further investment.
I have asked the Chancellor to work with us, the Oil & Gas Authority and industry, to also consider providing funding to those projects that demonstrate they can improve the capacity of Scottish sites for securing decommissioning, dismantling and disposal contracts.
The UK government must also do more to maximise economic recovery. Capital investment continues to fall and exploration remains at record lows – with only 14 exploration wells and eight appraisal wells drilled offshore in 2016. The supply chain has seen revenues fall by almost a third over the past two year and will come under further pressure.
We have previously outlined reforms such as the introduction of an Exploration Tax Credit, or widening of the Investment Allowance, which along with helping maximise production in current assets would also support exploration activity. Mr Hammond should give these his immediate consideration.
It is also crucial that critical offshore infrastructure remains operational. One year on from the announcement at the March 2016 Budget, we have called on the UK Government to deliver on its commitment to provide loan guarantees to the industry. This could unlock capital and stimulate new investment – providing a much needed boost to the industry, and in particular the supply chain.
The oil and gas industry remains of vital importance to the economy of both Scotland and the UK, supporting 330,000 jobs across the UK, with 124,500 in Scotland alone. It has contributed around £330 billion in revenues to the UK exchequer since production began.
We are doing everything within our devolved powers to support the industry and I call on Mr Hammond, before today’s budget, to do the same and make the right decisions for the North Sea.
Derek Mackay is the Scottish Government’s Cabinet Secretary for Finance and the Constitution
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