Heavy artillery

Author Konstantin Rozhnov

In the run-up to the Scottish referendum in September last year, London and Edinburgh were using North Sea oil and gas reserve and revenue projections as “heavy artillery” — a key argument for why voters should support or reject Scotland’s independence.

In the run-up to the Scottish referendum in September last year, London and Edinburgh were using North Sea oil and gas reserve and revenue projections as “heavy artillery” — a key argument for why voters should support or reject Scotland’s independence.

Despite differing views on how bright — or bleak — the future is for the industry, both sides always agreed that something needs to be done to guarantee the influx of much-needed investment.

Five months after the referendum and in the wake of a sharp drop in oil prices, the exact form and shape that this “something” is likely to take remains unclear, despite the constant war of words between oil and gas companies, UK and Scottish governments and labour unions.

And today’s anodyne first report from the much vaunted Oil and Gas Authority failed to recommend specific measures, confining itself to a restatement of the blindingly obvious problems facing the industry.

UK finance minister George Osborne, who is expected to announce North Sea fiscal changes next month, seems to be keen to keep everyone guessing until then. “We have already cut taxes — and if we need to we will do so again in the budget,” he said yesterday when talking about “our brilliant industry”, without providing any further detail.

Industry leaders met Osborne today, and industry group OGUK chief executive Malcolm Webb said after the meeting: “Of course the chancellor did not tell us what measures he would announce on 18 March, but we did come away encouraged by his well-informed understanding of the situation.”

The already-announced cuts Osborne is referring to were unveiled in December last year. The steps included an underwhelming reduction of the supplementary tax charge on oil and gas production, to 30pc from 32pc, after a much more significant increase from 20pc in 2011.

The UK government launched a consultation on a new investment allowance earlier this year, which is likely to cut the effective tax rate for companies investing offshore the UK to 45-50pc from levels of up to 80pc. A final decision on the allowance is expected next month. The industry is calling on the government to not only unveil this and other changes in the March budget, but also to implement them as soon as possible.

“The message the government has been putting out for a while was that they were going to try and make the tax regime more bespoke to encourage investment,” says Ernst and Young global oil and gas transaction advisory services leader Andy Brogan. “That is great, but they have been talking about it now since the Wood Review came out last year and it is now time to act.”

To convince Osborne that urgent far-reaching measures are needed to boost the UK’s offshore oil and gas sector, OGUK is using “heavy artillery” — numbers — again. OGUK’s annual activity report says capital investment in the UK's offshore oil and gas industry is likely to fall by as much as a third to £9.5bn-11.3bn ($14.7bn-17.5bn) this year, while the sector needs £94bn of investment to extract the theoretical maximum 10bn bl of oil equivalent (boe) in potentially recoverable reserves.

The point OGUK is making in the report “is not new, but putting some numbers on it makes it quite stark,” says Brogan.

The industry — and the Scottish government — would love Osborne to introduce investment and exploration incentives, as well as reduce the overall tax burden both for new projects and mature fields.

But labour union Unite thinks there has been too much emphasis on the wellbeing of oil and gas companies, while “a potentially disastrous 'race to the bottom' in working standards across the North Sea offshore industry” needs to be halted.

“Make no mistake, in a time of electioneering, OGUK is spelling out its own manifesto which focuses solely on how employers — who have generated billions from the North Sea for decades — can maximise their profits with as much public subsidy as possible,” Unite says.

For more information please contact OilBlog@argusmedia.com

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