Aberdeen may have just about sidled past the worst effects of recession thanks to North Sea oil&gas; nonetheless, there is a creeping paralysis gradually strangling the entrepreneurial drive that has come to characterise Europe’s Energy Capital of late.
A number of factors are at play, and all too familiar to Energy’s readers, key among them being the advanced maturity of the province, the impact of the banking crisis on credit lines for smaller exploration and production companies and North Sea supply-chain firms, and a fiscal regime that is under increasing fire.
As many of you know, after its initially muted response to Chancellor Alistair Darling’s parsimonious concessions offered in the 2009 UK Budget, trade body Oil & Gas UK has since become increasingly bold in complaining that far too little was offered and that the goose that has produced so many golden eggs for the Treasury is ailing and badly needs nurturing by, if nothing else, the scrapping of the selective corporation tax burden on new field developments.
At the risk of repeating myself, time and again, OGUK has comforted itself by saying there is an effective dialogue with Treasury when, in Energy’s view, that dialogue has been selective, with mandarins choosing to listen only to propositions that suited their purpose.
Since it is Offshore Europe time again – a time for discussion and debate on a grand scale – I think it is worth reminding ourselves that, just a couple of months ago, a group of MPs (the House of Commons committee on energy and climate change) came to much the same conclusion in their report on UK Offshore oil&gas.
Indeed, they are quite damning in many of their findings, the basic conclusion being that the industry is not crying wolf and needs concessions to create the win-win situation so talked about but not delivered.
Predictably, they called for Government to sort out the banks, but we will sidestep this issue as it is currently an across-the-board problem for the entire UK wealth-generation machine. The committee rightly says in its report that the Government cannot influence the amount of oil&gas remaining in the UK Continental Shelf.
But the policies it pursues in relation to tax, regulation and licensing all have an impact on the attractiveness of producing oil&gas from the UKCS, and therefore on production levels.
It extracted an admission that “it would be regrettable” if the remaining oil&gas harvest came in at the low end of the estimates, with a consequential need to import more oil&gas.
The committee regard this as “an understatement, given the contribution of the UK oil&gas industry to security of energy supply, tax revenues and employment”, and say that Government has to get its act together with a proper strategy if the full value of the North Sea prize is to be realised.
That investment is currently falling off the proverbial cliff did not escape the committee, and this was hammered home again in July by Oil & Gas UK as its economist, Mike Tholen, painted a frankly dismal picture on spending and the consequences of this on the remaining life span of the North Sea as a viable energy province. It reckons £5billion a year is still possible through to 2012, but only if Government sets the stage properly – and the MPs agree.
Otherwise, spending could plummet to just £2.5billion in 2010. This could equate to 250million barrels of production forgone and 50,000 fewer jobs – literally thrown away. Even more support vessels would be lying idle than is currently the case and rigs would trickle away to other parts of the world, perhaps never to return.
The MPs rightly pointed to what happened in the late-1990s when the bottom fell out of the global oil market and shocked the North Sea into near paralysis – a paralysis that took several years to cure. In Energy’s view, Government set that recovery back significantly by imposing an additional 20% of SCT over the basic corporation tax of 30% that all other sectors of British business and industry have to cough up, and Chancellor Darling has just compounded the problem.
As the committee’s report states: “Falling levels of investment have an adverse impact upon production levels and numbers employed in the industry. Declining investment can also hasten the decommissioning of infrastructure which might otherwise have been used to enhance production.”
Quoting renowned petroleum economist Professor Alex Kemp, of Aberdeen University: “The way to maximise economic recovery from the North Sea is to get a very steady stream of investment going. My worry, at the moment, is if it falls down for two or more years then we could be on a slippery slope and there will not be enough incentive to maintain the infrastructure, and then it will be too late.
“The Government must do what it can to facilitate investment, and the success of the steps announced in the recent Budget must be judged by whether they help stop the downward slide in capital investment.”
The committee is clear about the SCT issue. Its members want the Treasury to reduce this tax and to stop making life more complicated for the industry through introducing complex “value allowance” determinations.
As they say in their report: “A simple reduction in SCT would be unambiguous, simple and give a direct signal to industry that Government is committed to helping sustain the UKCS. This is, for us, the major point.
“Taking into account the lack of visibility of future prices, decisions to proceed with new projects are difficult to take and such a signal would have a real impact.”
Crucially, the MPs warn that the Government’s priority when determining policy on UK oil&gas should be security of supply, and they suggest that Westminster should examine further ways by which it can support UK oil&gas production in the current difficult economic climate.
And then, just a few weeks after the select committee reported, two-times energy minister Malcolm Wicks – now an aide of some sort – goes and generates a report which spells the answer out loud and clear – that the days of laissez faire are numbered and it is time for a firm interventionist hand.
We’ve been saying that for years.
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