The Tier-1 major oil exploration companies operating in the North Sea have called for more tax incentives to prevent production ‘falling off a cliff’ in just over four years’ time.
As crude oil prices plummeted from $110-barrel from June 2014 to around $30-barrel in Dec 2016, the major operators such as Shell, BP, Conoco, Total, all slashed capital investment in exploring for new finds.
The industry has shed more than 110,000 jobs in the UK supply chain over this period and now exploration and decommissioning work which could provide a lifeline for the supply chain is being held back by a lack of access to finance.
So much so, that UK Oil and Gas has been doing some ‘radical thinking’ around how the industry could work with HM Treasury and the Oil and Gas Authority to help stimulate activity in the short term, safeguarding the supply chain for the future while unlocking new fields to extend the life of the North Sea basin.
In a blunt warning to MPs on the Westminster Energy Committee – which is chaired by the SNP’s Angus MacNeil – Deirdre Michie, Chief Exec of UKOG. said:
“The downturn has meant that companies have cut capital investment. This is sensible for individual companies’ survival, but is having a detrimental impact on the UKCS’ long term future as rigs are scrapped or cold stacked and jobs and skills are lost.
“In addition, unless we discover more fields now, production will drop significantly after 2020, threatening security of supply and future jobs.
“For companies who have the prospects and capital to explore or assets which are ready for decommissioning, there has never been a better time to undertake activity given the competitive position of the market. We believe a short term boost to cash liquidity could help companies take advantage of low rig rates and kick-start drilling again.
“One solution would be to allow companies who have invested in the UKCS historically and have built up tax losses with the UK Exchequer to trade these losses for a tax credit. This tax credit would provide finance for exploration drilling as well as help access small pools development.
“The tax credit would be designed so that it could not be returned to shareholders but only be invested on the UKCS within a particular timeframe and in drilling particular prospects, specified by the UK Government. Any new activity resulting from this exploration would be taxed in the usual way, meaning more revenue for the Exchequer.
The oil majors also want further tax-breaks over decommissioning activities.
Michie (pictured, left) explained: “While we do not want to accelerate decommissioning, now is the ideal time for those fields which have already come to the end of their lives to progress their decommissioning agenda.
“In the Budget 2016, government confirmed that operators which retain the decommissioning liability but sell on an asset to another company to operate it in late life will be able to access decommissioning tax relief to which it is entitled under the tax code.
“Next we need to address the great number of instances where the buyer of old assets is able to secure the correct level of decommissioning tax relief which has been built up within the selling company but where the decommissioning liability has moved with the asset. “