At the outset, let me make the following clear:
First, the UK offshore oil and gas industry faces some very serious challenges but it is NOT in danger of being wiped out. While the industry is certainly not enjoying the best of health right now, it can and will recover.
Second, the troubles we face are not all down to the recent fall in the price of oil, that is a serious complication but it is not the root cause.
Third, while I am certain that these problems can and will be overcome, the cure, if it is to be effective and lasting, requires urgent, positive and collaborative action by all stakeholders across Industry and Government over the coming weeks, months and years.
How severe is the problem?
The vitally important but undervalued North Sea oil and gas industry certainly has some serious challenges to face and overcome. Furthermore, this trouble has been brewing for a long time and has made us less resilient than we should be for dealing with the complication of the recent oil price collapse.
But the situation isn’t irretrievable. It can be turned around. However, there is no time to be lost in applying the remedies, because with each passing day, the damage to the industry increases.
The roots of the problem
At the root of our troubles are two major sets of issues which have beset this industry for many years now. One set is the responsibility of the industry; the other set lies with government.
The industry’s cost base, particularly on a unit of production basis, has risen alarmingly in recent years. For all businesses a positive cash flow (the excess of cash income over expenditure) is important.
Unfortunately, if you take the UK North Sea as a whole, it now has a negative cash flow. In other words, looking across the entire industry, we are spending more cash than we generate. This is not a sustainable position to be in.
Oil & Gas UK research shows that, in the last three years alone, costs have soared by 45%. That awful fact was disguised somewhat by the high oil price but now that mask has been stripped away.
If that was not bad enough, we have also seen production volumes fall by 40% over the same period. This, in part, is because the average production efficiency of our fields (which is the percentage of time fields are actually producing oil and gas) has slipped from over 80% to about 60% today.
That is the equivalent of losing about 500,000 barrels of oil and gas a day.
I should point out, however, that not all fields have suffered this decline. Some have maintained and some even increased their production efficiency – which proves it can be done!
However, even if the industry had exercised stellar control over every aspect of its cost base, we would still face problems today as a result of what various governments have done or failed to do over the past 15 years or so.
Years of confused and confusing energy policy, not helped by a revolving door approach to the appointment of ministers (we’ve seen a total of 35 different Energy and Treasury Ministers given responsibility for our industry in the last 14 years), have raised serious questions about our politicians’ awareness and understanding of this industry and its vital importance to the UK economy.
There have been times when I have been truly bewildered by the way in which successive governments have treated the UK offshore oil and gas sector.
We have experienced repeated and increasingly aggressive tax hits, pushing taxation rates on production up to a maximum of 81%, while at the same time an under-resourced, overstretched regulator failed to deliver the expert and engaged stewardship which this mature and complex basin so badly needs.
All of this has weakened the international competitiveness and resilience of the industry, making the storm which has been recently whipped up by falling oil prices all the more dangerous.
The effects are clear to see
The North Sea has largely lost its attractiveness as a place in which to invest especially when compared to other more predictable fiscal regimes, including West Africa, Brazil, the Far East and other parts of Europe.
One very worrying consequence of this is that exploration for new oil and gas reserves on the UK Continental Shelf (UKCS) has virtually dried up.
Despite the high oil price of recent years, when we should have seen abundant activity, the number of exploration and appraisal wells collapsed to its lowest level ever.
As a result, the UK has failed to replenish the stock of oil and gas reserves we need for future developments. We are currently living off the results of exploration success of earlier years. Again this is not sustainable.
Why should we care?
Just in case anyone is wondering why it is important to find a way through these troubles, let us remember that this great UK industry still provides the country with at least half of its needs for oil and gas.
It also provides nearly half-a-million highly skilled, high earning jobs across the entire length of Britain, one hundred thousand of them engaged in the export of oilfield goods and services, earning £15billion per annum, for the UK economy.
Furthermore, oil and gas still accounts for over 70% of the UK’s primary energy supply and the Department of Energy’s own figures show that this is most unlikely to change very much any time soon.
So every barrel we fail to produce from our own resources will have to be imported. Imported barrels pay zero production tax and sustain no UK jobs but will hugely burden the UK Balance of Trade.
Maximising the production of our own oil and gas resources is, as they say, a “no-brainer”. In that regard we should also remember that, in about eight to 10 years’ time, onshore gas might play a useful part but for now and the immediate future it is only the offshore areas which can produce significant volumes of oil and gas for the UK.
But there is good news
The good news is that we know what actions are needed to get the industry out of the hole it now finds itself in and we are already seeing some of these implemented.
I believe both Government and Industry have turned a page and are in agreement on the priorities for action. I also detect a constructive political cross party consensus around this.
So I am increasingly confident that the turnaround can and will happen – though time is now of the essence.
There are three obvious and immediate areas for action: these are regulatory reform, fiscal reform and an unwavering focus on improving the efficiency and reducing the cost of operations.
Costs and Efficiency
Companies of all sizes, right across the supply chain, operators and contractors alike, are now engaged in a concerted effort to overcome the cost and efficiency challenge.
This work has, of course, been made even more urgent as a result of the recent price fall but it was needed and was being done even before that new complication arose.
So, while maintaining resolute commitment to the workforce’s safety and protection of the environment, every aspect of operations, including matters ranging from rig hire to work rotas and from new technology to existing commercial contracts, is being examined and improvement plans drawn up and implemented.
Oil & Gas UK will do all it can to help companies in this work but in the final analysis, it is up to the firms themselves to put these ideas into practice. Our job is to help where we can and to spread awareness and encourage collaboration.
But we should not underestimate the hard work that will be required to introduce and sustain the many changes which are now needed. However – and this is maybe the one positive result of the price adjustment for our industry – this work can no longer be put off or ignored.
In the current harsher price environment, those companies which fail to continuously improve their efficiency and quality of service will not survive. However, this is a very resourceful and talented industry. The very great majority of the companies within it will adapt, improve and prosper.
Stewardship
The excellent Wood Report has already presented us with the remedy for stronger stewardship of our natural resources and all sides have agreed to implement it.
We just need to get on with it: first, by implementing the new collaborative tripartite approach, between regulator, Treasury and industry aimed at maximising the economic recovery of UK oil and gas (MER UK); and second, by establishing the Oil and Gas Authority (OGA), the new, well-resourced, expert, arm’s-length regulator, to take over from DECC and facilitate the tripartite approach to MER UK.
An excellent CEO for the new regulator has recently been appointed but I am afraid that, on the current DECC timetable, it looks as if it will take until Summer 2016 before all the legislative and other processes are completed to finally give us the new empowered regulator which Sir Ian called for in February 2014.
This is far too long, especially given the recently price shock.
My plea is for all the political parties to work together in the spirit of Wood and, as a matter of urgency, to substantially accelerate that timetable. We badly need the OGA to become fully operational as soon as possible in 2015.
This cannot wait until June 2016.
Taxation
It is very good to hear the Government agree that fiscal policy must be framed in the context of the sector’s wider economic contribution and that action is needed to reduce the tax burden on the industry with a view to making the UKCS a more attractive destination for investors.
Encouraging first steps were announced by the Chancellor in his Autumn Statement.
Proposals for a simplified investment allowance, recently outlined by Danny Alexander and Priti Patel to the industry in Aberdeen, are a very welcome breakthrough as was their agreement to work together (industry, the OGA and HMT) with a view to having this allowance in place by the time of the next UK Budget and effective from January 1 (2015).
But this is not all that needs to be done. Ultimately on taxation our industry should be treated like all other businesses in the UK.
The 30% supplementary corporation tax charges should eventually be discarded, the outdated and now misplaced PRT tax reduced to zero and the industry furnished with a predictable fiscal regime which is internationally competitive.
We fully appreciate that the Government’s current finances preclude it doing all of this straight away but these reforms must not be put off for too long if we are to have a real hope of achieving the goal set out in the Wood Report and for which all in industry and Government have pledged their support, namely to maximise the economic recovery of the UK’s substantial remaining oil and gas resources.
Oil & Gas UK ‘walk the talk’
And finally, let me make it clear that Oil & Gas UK recognises that it also has to play a full and constructive part in all of this.
The board of Oil & Gas UK has required that we focus our agenda on the cost and efficiency challenge, the case for fiscal reform and the full implementation of all the recommendations of the Wood Report in priority to all other matters.
We too are changing the way we work and we are reducing our costs, with a 15% budget cut for 2015 coupled with a 33% reduction in the cost of our operation for our oil company members.
We are at one with all those seeking to secure the long and sustainable future of our industry.
Oil & Gas UK will “walk the talk”. That is what all the stakeholders in our industry must now do.
We know the changes which are needed and that they are achievable. The current circumstances demand they are now implemented as soon as possible.
Malcolm Webb is chief executive of Oil & Gas UK
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