24th Feb 2015 10:02
LONDON (Alliance News) - UK Chancellor of the Exchequer George Osborne is to meet the chief executive of Oil and Gas UK, the organisation that represents the UK offshore industry, on Wednesday to discuss what action is needed by both industry and government to "ensure the long term success of the sector."
Oil and Gas UK has conducted a survey to show its member companies' upcoming plans for exploration, investment and production in the UK, predominantly in the North Sea, and the organisation said the industry is "facing a difficult period as a result of falling oil prices."
The survey "provides striking evidence of how rising costs, taxes and inadequate regulation have taken their toll on the UK industry?s international competitiveness," and "highlights the urgency with which measures are needed to secure new investment and address the collapse in exploration," said Oil and Gas UK in a separate statement.
"Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground," said Malcolm Webb, chief executive of Oil and Gas UK.
But the organisation did say the current environment "highlights opportunities available if there is a continued joined-up action between the government, the Oil and Gas Authority and industry."
The Oil and Gas Authority is currently being set up and fast-tracked by the Department for Energy and Climate Change to regulate the North Sea.
Most oil and gas fields in the North Sea are ageing and becoming more expensive to maintain. The recent sharp slide in oil prices to about USD58 a barrel, from over USD115 a barrel last June, has put pressure on the North Sea operators and threatens tax revenue from a source that is still important to the UK's overall tax receipts.
Oil majors BP PLC and Royal Dutch Shell PLC are amongst the operators to have said they will cut North Sea expenditure plans amid broader spending cuts in the wake of the oil price drop.
Oil and Gas UK said there are 6.3 billion barrels of oil equivalent that are licensed or currently under development, but said there are another 3.7 billion barrels of oil equivalent that could be invested in. However, the organisation said its members have highlighted that only around 2.0 million of the 3.7 million barrels are ever likely to be developed.
The organisation added that operating expenditure rose by 8% in 2014, adding that a unit of production cost has "reached a record high" of GBP18.50 per barrel, whilst revenue from the North Sea have hit "the lowest since 1998," at around GBP24 billion for the year.
It has also predicted that the amount of projects moving from the investment phase into production will fall by about a third in 2015.
"Equally alarming is the three-year, 2015 to 2017 outlook for projects yet to get company sanction, in which planned investment has fallen from GBP8.5 billion in last year?s survey to just GBP3.5 billion in current forecasts. The basin is not generating new projects and as a result, there is very little fresh investment," said Oil and Gas UK.
Exploration is also not doing much better, with only 14 out of an expected 25 wells being drilled in 2014, with only 8 to 13 wells estimated to be drilled in 2015.
"Even at USD110 per barrel, the ability of the industry to realise the full potential of the UK?s oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation. At current oil prices, we now see the consequences only too clearly," said Webb.
The Treasury Tuesday said the Chancellor has "vowed to take further action to support the North Sea oil and gas industry" in response to Oil and Gas UK's survey.
In 2013, Sir Ian Wood was commissioned to carry out a comprehensive review of the North Sea, and following on from the report by Wood, the Chancellor announced he would implement a tax cut of 2% from the beginning of 2015, which the Treasury calls a "radical plan."
The 2% cut was applied to the supplementary charge, which dropped to 30% from 32% and Osborne said the rate would be reduced further "in an affordable way."
Osborne has also recognised that "the tax burden needed to fall further over time," and the Treasury said that Osborne "has taken further action and fast-tracked a consultation on the investment allowance" since December.
"As part of the continuing work between the government and the industry, the Chancellor is tomorrow meeting with Malcolm Webb, chief executive of Oil and Gas UK, and other industry leaders, to discuss what action is needed by both industry and government to ensure the long term success of the sector," said the Treasury in a statement.
"We've got record investment in the North Sea, and there?s a lot of oil still in there. We want to continue to maximise investment in the North Sea to make sure it continues to provide jobs and economic benefits to the whole of the UK. The North Sea is a great national asset and we will do everything to protect it," said Osborne.
"I?ve already cut taxes in the North Sea and we're now looking at what more we can do to work with industry to support investment in this important sector," he added.
"The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline," said Webb.
By Joshua Warner; [email protected]; @JoshAlliance
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