Confidence in North Sea oil and gas activity has fallen to a six-year low, highlighting an "urgent need" for fiscal reform in the basin, according to a report published today (25 November).
Aberdeen & Grampian Chamber of Commerce's (AGCC) report, based on its annual survey of the industry, comes the week before UK Chancellor George Osborne's Autumn statement, which is widely expected to set out planned changes to oil industry taxation.
AGCC's report says that, for the first time since 2008, more operators and contractors are pessimistic about their UK Continental Shelf (UKCS) activity than are optimistic.
Almost two-thirds of all firms surveyed (62%) believe the government’s top priority with regard to the sector should be a revision to the fiscal regime to ensure it encourages exploration and extraction.
One respondent explained that “a sliding scale tax on mature declining fields would extend the economic date for cessation of production [and] improve the investment case for development of mature fields.”
Another warned that “if we don’t maintain or increase the level of exploration and extraction there will be no meaningful business in 20 years.”
Some 17% of firms believe the government’s top priority should be developing a strategy for implementing Sir Ian Wood’s “Maximising Economic Recovery” recommendations, and 9% believe improving collaboration within the industry should be the number one priority. The creation by government of a new regulatory body funded by industry is top of the agenda for five per cent of companies in the sector.
The importance of the content of the Chancellor’s forthcoming announcement supports a recent report by Deloitte suggesting that oil and gas firms could be delaying key decisions until after the Autumn statement. The report revealed that there were just four offshore deals announced in Q3 this year, down on 14 in the same quarter in 2013.
Uisdean Vass, oil and gas partner at Bond Dickinson, said: “This survey provides a stark warning for the Government. Confidence is at its lowest since 2008. Costs are making exploration and production in the UKCS, relative to other petroleum provinces worldwide, increasingly less economical, exacerbated by low oil prices and high tax rates ranging from 62% to 81% paid by producers in the UKCS."
James Bream, research and policy director at Aberdeen & Grampian Chamber of Commerce, said: “In a mature basin like the UKCS, the industry must cut costs, innovate and increase collaboration, but it cannot work in isolation of Government and a consistent, fair and stable tax regime is crucial. Companies are not convinced they can get a fair return on their investment and in a global industry, it is very simple for them to move their capital elsewhere.”
The survey shows that 15% of firms are more confident about their UKCS activity than a year ago, while 46% are less optimistic. This is a sharp decline in optimism from the levels seen over the past two years.
Fewer than half of respondents (49%) are working at or above optimum levels in the UKCS, the first time the majority of firms have been working below optimal levels in the UKCS for three years.
An increasing number of contractors (71%) say that they believe they could be involved in decommissioning activity in the next three to five years, the highest level since 2011.
The report also reveals that almost a third of contractors (29%) are currently involved in renewables work, broadly the same as a year ago. However, confidence in the future of their involvement in renewables has dipped, with just 44% of contractors expecting their involvement to increase in the next three to five years, down from 51% this time last year.
James Bream continued: “We must aim to avoid premature decommissioning which will cost the taxpayer, reduce revenues to government and have an impact on our energy security.”
More than half of operators (57%) and contractors (54%) reported increases in their total number of employees in the past year, with a particularly strong demand for permanent staff.
The survey reveals a move towards permanent staff, with half of operators (50%) reporting a reduction in contract staff in the past year and almost two-thirds (64%) expecting a further reduction in the next 12 months.
Average pay increases have remained strong with a 3% increase for operators in the past 12 months and a 5.1% increase for contractors, well above general national employment trends. The main reasons given for instigating pay increases were the need to retain key staff (74%); a shortage of key skills (41%); and the cost pressures of operating in the local economy (39%).
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