N. Sea investment remains stuck in low gear as industry calls for more UK tax breaks

N. Sea exploration remains at record lows and the basin urgently needs fresh capital to stimulate activity to unlock the UK’s estimated remaining resource of up to 20 billion barrels of oil and gas.

The challenges for the basin ahead, particularly for companies in the supply chain, are still considerable. 

Consequently, Oil & Gas UK today urges the British Treasury to extend the investment allowance to operational activities that are focused on maximising economic recovery.

As companies continue to adjust to lower commodity prices, they remain focussed on near-term financial rebalancing and consolidating recent efficiency improvements. Only a limited number of competitive opportunities are able to secure investment funding. As a result, investment in the N. Sea is expected to continue to fall.

In particular, the wave of fresh capital investment seen in recent years is declining rapidly as fields currently in development come on-stream. The industry anticipates a total spend of almost £17 billion in the UK this year, around 3 per cent lower than last year.

Deirdre Michie. Oil & Gas UK Chief Executive, said: “Confidence is slowly returning to the basin.

 “The revival is led chiefly by exploration and production companies which may collectively see a return to positive cash-flow for the first time since 2013, provided costs are kept under control and commodity prices hold.

“While the reduction in headline tax rates of recent years has helped create one of the most competitive fiscal regimes for upstream investment, certain adjustments are still required to drive investment over the longer term.

“However, this is unlikely to translate immediately into reinvestment or increased activity.

There are indications however that the bottom of the cycle may have been reached and that business may at last begin to stabilise. While $4 billion worth of asset and corporate deals announced since January have been a significant vote of confidence in the basin, Oil & Gas UK believes that more can be done to facilitate the transfer of assets in the basin and so stimulate additional investment.

 

What is the Investment Allowance?

The Investment Allowance is an allowance against tax that only applies to oil and gas companies. The Investment Allowance is only available against one of the three oil and gas taxes i.e. the Supplementary Charge.

The measure supports the Government’s objective of providing the right conditions for business to invest in the UK and UKCS to maximise the economic recovery of the UK’s oil and gas resources, at a time when the North Sea industry is facing considerable challenges.

Building on the introduction of the Investment and Cluster Area allowances, the measure aims to encourage further investment in the UK and UKCS, leading to increased production of oil and gas, helping to increase the UK’s energy security, and supporting jobs and supply chain.

This is why industry is continuing to ask the Treasury to revise the tax treatment of decommissioning liability in support of this.

 

Following a two-year downward trajectory, last year saw the share price performance of listed supply chain companies with a strong UK presence pick up by 3 per cent. Moreover, approval for new capital investment could potentially rise this year with more than £1 billion of new field developments being sanctioned.

A number of multi-billion-pound investment opportunities are also under consideration for approval in 2018-19.

Michie added: “It is crucial that these projects are progressed efficiently through to development and new ones matured to avoid a potentially significant production decline after 2020 and provide much needed business opportunities for the supply chain.

“The Government’s proposals for an Industrial Strategy are therefore a timely intervention. Oil & Gas UK will be working to ensure the oil and gas sector remains at the heart of UK industrial policy and present a business case for a sector deal. We need to ensure the competitiveness of the supply chain and build resilience through diversification and exporting. Such an approach will enable the whole industry to continue contributing to overall UK productivity and economic performance.”

The impact on the supply chain has been particularly hard. Companies have seen an average 30 per cent fall in revenues over the last two years and are turning increasingly to overseas markets to offset the shortfall in domestic activity.

Exports of goods and services are expected to be around £12 billion in 2017. Although overseas revenues have fallen by £4 billion in since 2014, reflecting the contraction in global spend, they now account for 43 per cent of supply chain revenues, demonstrating the importance of international markets.

The UK offshore oil and gas industry is now in better shape to compete for much-needed investment and confidence is slowly returning to the UK Continental Shelf (UKCS) following an intensive two-year drive to improve efficiency, streamline costs and boost productivity.

Domestic oil and gas production continues to rise and unit costs are improving, resulting in a more resilient and globally competitive basin, despite on-going lower commodity prices, according to Oil & Gas UK which today publishes its Business Outlook Report 2017.

The report points to a further 5 per cent rise in output to 1.73m boepd (630m boe pa) in 2016.  Production has now been rising since 2015, bucking a 15-year trend of decline, and should continue to rise over the next two years to peak at between 1.8 and 1.9m boepd by 2018. 

This is due to strong investment in new development in recent years, which has brought a total of 34 new fields into production since 2013, as well as improved productivity on existing fields.

A further 13 to 18 new fields could start producing this year, building on recent success. By 2018 recent start-ups are expected to contribute up to 600,000 boepd, around one third of UKCS production.

Measures to bring the industry’s costs under control are taking effect. Average unit operating costs have improved by half within two years from $29.70/bbl to $15.30/bbl. Capital efficiency is also improving.

Development costs for newly approved projects have reduced by more than 50 per cent since 2013 and are expected to be lower again in 2017 reflecting costs trends as well as investment constraints.

Callum McCaig, MP
Callum McCaig, MP

Aberdeen South MP Callum McCaig – the party’s Energy spokesman in the Westminster parliament –  has called on Philip Hammond to bring forward measures to safeguard the future of the N. Sea oil and gas sector when he delivers the last spring Budget tomorrow (8 March).

He also called on the Chancellor to reverse his predecessor George Osborne’s decision to scrap the £1 billion competition for developing the ground-breaking  joint Shell-SSE carbon capture and storage technology – despite spending £100 million of taxpayers’ money on the scheme – which would have brought 600 jobs to the Peterheid area.

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed