The oil price slump has hit the UK’s energy industry harder than almost anywhere else. Already beset by sky-high costs, rapidly depleting fields and uncertainty about who pays to decommission old platforms, investment in the North Sea threatens to collapse as oil trades near $50 a barrel.
The industry is expecting Chancellor of the Exchequer George Osborne to help with tax cuts on Wednesday when he delivers the government’s last budget before May’s general election. The group that represents oil and gas companies wants the tax on profits cut and a simpler and more generous tax break for investment.
“Tax changes are vital,” Malcolm Webb, chief executive officer of lobby group Oil & Gas UK, said in a statement on Monday. Action “is urgently needed in order to help re-establish the competitiveness of the UK oil and gas industry.”
Against the backdrop of an oil price which has halved in the past year; where investment in the UKCS is forecast to fall dramatically over the next 2 years; and where exploration activity is at a worryingly low level, the pressure on the Chancellor has been mounting for the past few months.
In the Autumn Statement the reduction in supplementary charge of 2% fell far short of industry hopes. However, the comments by Danny Alexander, Chief Secretary to the Treasury, the following day were more encouraging, signalling a fundamental change in policy for UK oil and gas exploitation.
No longer is the focus to be on raising tax revenues but rather on the macro economic benefits of maximising the hydrocarbons extracted from the UKCS. The Budget tomorrow represents the first opportunity for the government to put this new policy into action.
The UK has been told to host an international summit that would draw-up a “visionary” new strategy to safeguard the future of the North Sea.
A report by a group of peers has today called for a “step-change” in the management of the sea, including the creation of common policies on the environment, shipping, fishing and energy.
The House of Lords’ European Union committee made the recommendations after holding an inquiry that was launched last July.
A three-pronged approach comprising tax incentives and cuts as well as industry cost reduction could increase North Sea production by as much as 3 billion barrels of oil by 2050, a new report has shown.
The research paper, by leading petro-economist Professor Alex Kemp and Linda Stephen, also showed how a combination of tax cuts and incentives, plus a 15% cut in industry costs, would see firms invest a further £22billion in field development as well as spend a further £23.4billion in operating costs than if things stayed as they were today.
Professor Kemp and his associate worked out a range of scenarios affecting North Sea economics ahead of tomorrow’s budget, which is expected to provide some relief for beleaguered oil and gas producers.
Oil workers have been evacuated from a North Sea platform after a supply vessel crashed into it.
Production on the Apache-operated Forties Echo was also shut down following the incident at around 8.40am yesterday.
An Apache spokesman said 15 personnel were flown by helicopter to the nearby Forties Bravo as a precaution.
A further 15 workers remain on board the stricken platform.
There were no injuries as a result of the collision and no hydrocarbons leaked into the sea.
This week’s Budget is “the most important” in terms of the future of the North Sea oil and gas industry, according to a leading figure in the sector.
Sir Ian Wood called for “really significant” action from Chancellor George Osborne to address a lack of confidence in the region and protect jobs.
Describing Wednesday’s Budget as a watershed moment, he said: “Unless we get this right we will lose a huge amount to the UK economy and the UK will be the loser.”
Sir Ian is the founder of the Wood Group and he has conducted a review of offshore oil and gas recovery for the UK Government.
Following the slide in oil price, which commenced in earnest in July 2014 and by 31 December had fallen by more than 40% in 6 months, alarm signals have been sounding loud and clear throughout the sector.
Collectively industry drew a deep breath on the 1 January 2015 as it pondered what the year would bring. Could the price go lower than the $57 recorded on the 31 December and how soon would the price rebound?
Well the answer to the first question has been yes, to just over $45 on January 13, and the answer to the second is anyone's guess but looks increasingly like a slow recovery with many predicting an average Brent price of $75 for 2016.
Technology giant ABB has won a $155million contract from Statoil to power the first phase of the Johan Sverdrup field development.
The company was awarded the deal for land-based power supply to phase 1 of the North Sea field operations.
The Johan Sverdrup oil field will be operated by land-based power supply and during its first phase of development, a system will be established for supplying power from shore to production start in 2019.
The largest new gas field to be discovered in the southern North Sea for 25 years is expected to lead to an economic boost across the east of England and a“massive benefit for UK industry".
Gas will start flowing into Bacton later this year from the Cygnus field, one of the biggest projects in the southern North Sea for years.
We may find ourselves in one of the most challenging eras our industry has encountered but, whilst there are challenges and consequences ahead for many, there is also the opportunity to look at what can be done to control the costs of oil and gas projects at planning and execution stage.
A north-east business body has called on the UK government to stick to its promise on cutting North Sea oil and gas taxes and to maintain fiscal stability after the general election.
The Aberdeen and Grampian Chamber of Commerce (AGCC) has also called for “swift delivery” of a proposed £2billion Aberdeen ‘city deal’ to boost local infrastructure and make up for the benefits other cities will get with investment in high speed rail in its manifesto ahead of the May election.
As the UK offshore industry anxiously awaits news from the Treasury regarding changes to the North Sea fiscal regime, let’s look at the historical context of a province where frequent change has been the norm.
I write as a result of discussions with industry tax expert Phil Greatrex, MD of CWEnergy. Phil has been kind enough over many years to teach high level petroleum taxation at our annual UK Oil and Gas Law teaching week for CEPMLP of Dundee University.
The special regime for North Sea taxation was first introduced in 1975, just as the first big offshore fields were coming on-stream.
David Glen, head of tax at PricewaterhouseCoopers (PwC) in Scotland, said there is a “real danger” plunging oil prices could result in investment becoming uneconomic, leading to diminishing field life and speeding up decommissioning.
The latest economic report from the University of Strathclyde’s Fraser of Allander Institute, sponsored by PwC, joins calls for the Chancellor to take action in the Budget later this month.
David Glen, head of tax at PricewaterhouseCoopers (PwC) in Scotland, said there is a “real danger” plunging oil prices could result in investment becoming uneconomic, leading to diminishing field life and speeding up decommissioning.
The latest economic report from the University of Strathclyde’s Fraser of Allander Institute, sponsored by PwC, joins calls for the Chancellor to take action in the Budget later this month.
The head of the Scottish Government’s Energy Jobs Taskforce has pledged to do “everything possible” to ensure skills are not lost in the current oil price crisis facing the North Sea oil and gas sector.
Lena Wilson, who is chief executive of the economic development agency Scottish Enterprise as well as chairwoman of the taskforce, insisted the group is “not a committee or a talking shop” and plans will be backed by government funding when required.
She said: “If we come up with any ideas that need funding, we will first of all look to the significant existing resources we have.
UK oil and gas explorers face some very difficult trends that threaten the long term future of the North Sea. Wells are simply not finding enough new resources.
These problems set in long before the recent oil price declines and will not be easily resolved if and when oil prices recover. Explorers need to adopt bold new strategies if they are to address the fundamental issue of small discovery volumes.
Lack of investment is not the issue.
Over five years to 2013, the UK industry spent US$13.9 billion on exploration and appraisal work.
Wood Group chief executive Bob Keiller has backed the development of a skills-matching “dating service” for thousands of oil and gas industry workers in the north-east who fear losing their jobs.
Through Wood Group’s recruitment team, Altablue, workers facing redundancy can start searching for jobs in the public sector, including at Aberdeen and Aberdeenshire councils, the NHS, the fire and police services and at Robert Gordon University.
The offshore oil and gas industry is reaching an inflection point. As the oil reserves in shallow waters reach the end of their production lives, operators must take the long view and drill in deeper waters to find new recoverable resources.
Doing this economically presents some significant challenges – a feat which will require serious innovation if firms which grew up with the North Sea are to successfully export their skills.
Using conventional methods is not an option – it’s simply not feasible to place a production rig above a well in water that’s thousands of metres deep. For that reason, the industry is thinking differently about how it works and how it uses technology.
German utility RWE yesterday closed the sale of oil and gas production arm RWE Dea to Russian billionaire Mikhail Fridman, ending months of uncertainty over whether the £3.7billion deal would go ahead.
But it causes embarrassment for the UK Government, which tried to block part of the transaction at the 11th hour, citing possible sanctions against the new owner.
It remains to be seen how Westminster will respond to RWE Dea’s UK North Sea assets – now owned by new company L1 Energy – falling into Russian hands.
Scotland has benefited enormously from the huge oil wealth produced by the people of Aberdeen and the north-east.
Over 40 years, 42billion barrels have been taken out of the North Sea by an oil industry that worked out of Aberdeen and Peterhead.
And over many years in visits to Aberdeenshire to see my parents, or simply to visit the industry, I have seen how the skills developed in the north-east have boosted the British economy and kept the country ticking through thick and thin – and in decade after decade – since oil was first discovered.
Over 30 years oil, has averaged around 17% of the Scottish economy.
But now in a year when oil prices have fallen 40%, we face what is more than a normal trough in the oil production cycle as some of the industry’s great experts, Sir Ian Wood and Lord Browne, formerly of BP, have recently reminded us.
The fall in world oil prices comes at a time when extracting oil from the North Sea is more challenging than ever and has brought us, earlier than we could have expected, near to a tipping point for the industry.
Wood Group Kenny (WGK) has appointed a North Sea regional director with 20 years of experience in the oil and gas industry as their new chief executive.
WGK's new chief executive, Bob MacDonald, succeeds Steve Wayman who has now become the company's new head of strategy and development.
He is replacing Ali Green who will step down from his current role but will continue to provide support to the team as he transitions out of the business in 2015.
Near-to-market technologies and world-class research capabilities will be highlighted to the oil and gas industry in Aberdeen this week.
The Oil and Gas Innovation Centre (OGIC) and Innovation Centre for Sensor and Imaging Systems (CENSIS) are to jointly host an innovation pavilion during the 2015 Technology Showcase conference and exhibition on Wednesday.
OGIC chief executive Ian Phillips said: “The innovation centre pavilion will highlight the expertise and capabilities of Scotland’s academic and SME (small and medium-sized enterprise) technology communities which can address the showcase theme of making technology reduce cost and improve efficiency.
Gordon Brown is calling for the creation of a North Sea reserve fund to help the oil industry in one of his final speeches before stepping down as a politician.
The former prime minister believes the fund would help maintain and upgrade infrastructure and could provide last-resort debt finance for companies who want to keep fields open.
He believes the Government could even take over fields in partnership with some firms in order to keep them open and viable in future.
The Kirkcaldy and Cowdenbeath MP, who is stepping down from Westminster at May’s election, also wants to see young people encouraged to work in hi-tech medical, environmental and engineering jobs as traditional manufacturing work continues to decline.
One of Russia’s richest men is expected to become the owner of a string of UK North Sea assets today, despite a last-minute move by the UK Government to block part of the £3.6billion deal.
The Department of Energy and Climate Change (DECC) said Energy Secretary Ed Davey was worried about the effect “possible future sanctions” could have on the continued and safe operation of the assets.
Billionaire Mickhail Fridman and business partners in the LetterOne investment fund are buying RWE Dea, the international exploration and production arm of German utility RWE, including operated stakes in the Breagh, Cavendish, Clipper South, Topaz and Windermere gas fields.
The four horsemen of the apocalypse are not about to show up in Aberdeen but Europe’s energy capital is facing a serious downturn” in its fortunes, an oil and gas expert said last night.
Alan Kennedy, UK oilfield services lead partner in the Aberdeen office of professional services firm KPMG, was speaking in advance of an energy industry breakfast “summit” in the Granite City.
The event will be hosted by trade body Oil and Gas UK (OGUK) and KPMG at Aberdeen Exhibition and Conference Centre, and will focus on the impact of lower oil prices on the north-east economy.
A new maintenance support ship for Shell’s southern North Sea gas operations made its first appearance in UK waters at the weekend.
Shell said the vessel, named Kroonborg, would change the way the company and partner Nederlandse Aardolie Maatschappij (NAM) operated more than 50 gas producing platforms.
It is expected to reduce the cost of operating smaller gas fields, which are becoming increasingly prevalent, by improving the productivity and safety of maintenance engineers.
