This has been another challenging year for the North Sea oil and gas industry, however I believe that there continues to exist a wealth of opportunity for this strong, resilient and innovative sector.
I am in Aberdeen today to co-chair the Oil and Gas Industry Leadership Group as part of a series of meetings with industry leaders.
We are already starting to see measures of success through improving both the stewardship of assets, evidence of cost reductions, and improved production efficiency, which increased by over 10% in the last year.
These are heartening signs that the industry is adapting to the challenges it faces.
Only days away from the UK Government’s Autumn Statement, however, there remains a substantial amount that must be done to support the North Sea further.
The key levers to help support the industry are controlled by the UK Government and – if it indeed wishes to priorities industrial strategy as it has stated – then the Autumn Statement must deliver measures that demonstrate its commitment to the industry and the jobs and communities it supports.
There are a number of measures which I believe must be introduced without delay that could have a significant impact.
Firstly, I believe that access to decommissioning tax relief must be improved, so that the tax history of a field is transferred during the transfer of an asset. This is of particular significance, as without this measure we will not be able to achieve full economic recovery.
It is, therefore, crucial that assets are in the right hands and that there are no barriers to late life transfers. To illustrate the potential opportunities, Scottish Government analysis of fields nearing decommissioning has identified that the remaining value of these assets could increase by over 50%, or almost half a billion pounds.
Secondly, I believe that the UK Government must now take action to deliver on the Chancellor’s commitment in March to consider loan guarantees for the oil and gas sector to ensure that critical assets and infrastructure remain operational. Further details must be provided on the use of loan guarantees to unlock access to capital and protect critical pieces of infrastructure, as set out in the March budget.
The need and scale of access to finance is clear. Scottish Government analysis has identified 45 unsanctioned potentially commercial fields within the North Sea with the potential to unlock around two billion barrels of oil and gas – however this will require around £39 billion in capital expenditure.
Even fields with favourable economics are struggling to secure development funding, demonstrating the urgent need for interventions to support liquidity in the industry.
Delivery of the commitment of Loan Guarantees could be important for unlocking capital investment and stimulating investment. This is of vital importance to the supply chain, which we have seen being the hardest hit by the recent slowdown, and which requires immediate support.
Finally, measures must be introduced to help stimulate and encourage exploration. The Scottish Government has previously called for policy changes – such as the introduction of an Exploration Tax Credit (ETC) or reforms to the Investment Allowance (IA) to widen eligibility for unsuccessful exploration, and the industry themselves have outlined proposals to unlock capital for investment in exploration.
We have seen a number of welcome changes this year, notably with the creation of the Oil and Gas Technology and Centre, as part of the development of the Aberdeen City Region Deal. This is an exciting development, and will providing the focus and support for innovation that the industry requires to maximise economic recovery from the basin. We have also seen the Oil and Gas Authority (OGA) transition to an independent regulator. This is an important step, and great news for the industry. The OGA can now act with greater speed and flexibility, to increase investment in the basin, support jobs, and maintain our strong competitive advantage within the global oil and gas industry.
The Scottish Government continues to take action using our devolved powers. The Energy Jobs Task Force is bringing together key partners to maximise employment opportunities for those in the industry; but also to provide support for the individuals and companies impacted by the downturn. The Scottish Government’s Transition Training Fund is also having an important impact. We have seen the industry’s coordinated response to facing these challenges in terms of improving collaboration, encouraging cooperation and increasing innovation.
With the fall of around 120,000 jobs across the UK supported by the sector since its peak in 2014, there is a clear need for urgent action. The UK Government must now outline its commitment to supporting this important sector in the Autumn Statement, alongside a firm timetable for further policy reforms to ensure that the 20 billion barrel potential of the North Sea is fully realised.
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