There can be little doubt – either for us as energy professionals in the sector, or anyone who has picked up a paper over the last few months – that the UK oil and gas industry is facing a serious challenge.
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Mike Tholen, Economics Director, Oil & Gas UK. |
The falling oil price, while great news for the general public, is affecting activity across the UK North Sea and companies have to take hard decisions in this challenging business environment. In addition, to sustain the economic benefits the industry has provided for many decades, urgent action is needed to deliver fiscal change by the 2015 budget. That is why we, at Oil & Gas UK, are committed to working closely with HM Treasury to do just that.
In parallel, there needs to be swift implementation of the Wood Review recommendations, while industry concentrates on addressing the costs and efficiency of its operations across the North Sea. Those factors become ever more pressing in light of current developments.
In January, we saw the oil price fall below US$50 per barrel – significantly less than half it was six months ago and the lowest in some years. The UK Continental Shelf (UKCS) is a mature basin with mature assets, and these will struggle increasingly if investment to maintain them falls. What’s more, unfortunately, both exploration and new investment will also be under increasing pressure as prices fall.
Even in the “$100 world,” we were beginning to face a reigning-in of investment to conserve capital and improve capital efficiency; UKCS investment was already expected to halve over the next four years. In an “$80 world,” according to our data, about a third of these opportunities are unattractive. Perhaps even more worrying, existing operations are also under pressure, in a “$60 world,” 10% of UK production – including vital infrastructure hubs – could be running at a loss, needless to say that that percentage gets higher as we head below the $50 mark.
While it might be hard to be confident of the outlook in such a business environment, we as an industry must work in collaboration with all our stakeholders across industry, and crucially across government, to find a cure for our current ills. Our sector is not in danger of total collapse, as has been suggested by some. We believe it can and will adapt – but at what cost? The “cure” must of course be effective and lasting – crucially, it needs urgent, positive and collaborative action in the weeks and years ahead.
We need to ensure that those fields acting as hubs for North Sea activity remain active and that industry is supported by the government to increase its competitiveness and secure future investment.
It is positive news that the government agrees fiscal policy must now be framed in the context of the sector’s wider economic contribution. Indeed, the first steps were taken in the Autumn Statement with the proposal of a simplified investment allowance and a limited reduction in the headline rate of tax. However, these measures were suggested when the oil price was more considerably higher than it is now.
We now need to see, without delay, delivery of the full range of fiscal measures required to sustain this industry, including, crucially, the investment allowance by Budget 2015.
Ultimately, however, should our industry not be treated fairly as any other business in the UK? We’d argue that in time the 30% supplementary corporation tax must be discarded, alongside the outdated petroleum revenue tax, to ensure our home-grown industry can compete with international markets.
Every barrel we fail to produce from our own resources will have to be imported. Imported barrels do not sustain any UK jobs and pay no production tax.
If government approaches our industry with a long term view – this approach will be mirrored from within our sector - as companies will become increasingly confident in investing in the UK North Sea for the long term. That’s what we need to see – for the benefit of UK jobs, UK energy security and the UK’s economy.
About the author:
Mike Tholen is economics director for Oil & Gas UK. Prior to joining the industry body he worked with Shell for 20 years, latterly holding a variety of commercial positions including economics and planning manager for their upstream UK gas business and Offshore Infrastructure Manager in the Netherlands.
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