In a letter to both the UK Chancellor of the Exchequer and Scotland’s First Minister, independent business organisation N-56 has put forward a five-point plan to secure the short-term and longer term future of the North Sea oil and gas sector, urging both the UK and Scottish governments collaborate on implementing this.
The report is launched today – the day that the Scottish Governments hold a debate in the Scottish Parliament on “Action Needed to Support the Oil and Gas Sector” and in the run up to the UK Government Budget on March 18.
The five-point plan forms the centrepiece of its latest report – Oil & Gas: A Long-term Plan to Maximise Economic Impact. This is N-56’s latest Scotland Means Business report, part of a series of reports which aims to propel Scotland to become one of the top five wealthiest countries in the world.
At the heart of this is a call for government policy and decision makers responsible for oil and gas taxation and regulation to be relocated from London to Aberdeen, moving them closer to the industry itself and echoing the situation in Norway.
This would include UK Government functions such as HM Treasury oil and gas taxation and Department of Energy (DECC) functions and the Scottish Government’s Energy Directorate. This will ensure they are closer to those whose jobs and businesses depend on the continued success of the sector, making it more responsive.
Such a move would echo the welcome decision to locate the new Oil and Gas Authority, the independent regulator, in Aberdeen and would deliver a vital boost to the sector, ensuring that it can truly realise its full potential. It would also echo the situation in Norway where policy makers in the petroleum directorate (Om Oljedirektoratet) are co-located with the industry in the Norwegian oil capital, Stavanger.
The report was prepared for N-56 by BiGGAR Economics, drawing on research from energy consultancy, Tulloch Energy and policy and economics consultancies, DAMVAD (Norway, Sweden and Denmark).
The report emphasises the strengths of the oil and gas sector, which supports more than 200,000 Scottish jobs and with 90% of UK reserves in Scottish waters, Scotland is the largest oil producer and second largest gas producer in the European Union.
The reduction in the oil price has had an effect on the economic contribution of the North Sea oil and gas sector and there could be significant impacts if the lower price continues in the long term. However, the long term price of oil to 2040, as predicted by OPEC is expected to be $100 per barrel to reflect the global rise in costs of production.
‘N-56’ is a partial-latitudinal address for Scotland, which lies 56-degrees North of the equator. The N-56 five-point plan also proposes:
Tax regime to maximise economic impact: the tax regime for the oil and gas sector should be designed to maximise economic impact rather than short-term tax revenue for the Treasury. This may mean sacrificing tax revenue in the short term but will mean that the tax revenues will be much greater in the longer-term. Following the Norwegian example, the tax regime needs to recognise that the UK Continental Shelf is a mature basin and incentivise exploration, investment and research and development.
Hydrocarbon Investment Bank: recognising the changing structure of the sector and the increasing role of small developers, a Hydrocarbon Investment Bank should be established (along similar principles to the Green Investment Bank, which is based in Edinburgh) to boost investment in the sector. This would be tasked with both a domestic and an international remit and would be able to support exploration companies, operators and the wider supply chain.
Norwegian-style long-term strategy: to fully exploit the oil and gas reserves left in the North Sea. This plan would far exceed the scope, scale and ambition of the myriad of existing strategies and business plans. It echoes the strategic approach taken in Norway where policy has been developed by government, the industry, public sectors and others working collaboratively to identify the measures required to maximise the sector’s long term economic contribution, giving much greater support to the industry than from Government. As part of the strategy a small percentage of taxation receipts (perhaps 5%) should be ring-fenced and used to fund R&D, skills development, international business expansion support and other activities designed to foster economic growth.
Incentivise offshore unconventional opportunity: incentivise R&D activity and feasibility studies of Kimmeridge Clay unconventional production – offshore ‘fracking’. While this opportunity is currently at a very early stage of development, if it is proven to be feasible it could extend UK oil and gas production for another century, and so should receive policy attention now.
Dan Macdonald, Founder of N-56, said: “The oil and gas sector has the potential to remain a centrifugal force for decades to come, as the oil price returns to a normal global level as is predicted.
“Meanwhile it is critical that exploratory development and the future potential of our North Sea resources continues unabated and that we are prepared for short terms slumps, as well as the long term highs that have seen the massive positive flow of tax revenue from which the UK has benefitted.
“The five-point action plan, outlined in our letter to the Chancellor of the Exchequer and First Minister, will ensure that the remaining potential of Scotland’s offshore oil and gas reserves is maximised, with strategic refinement. The urgent necessity of both administrations working together on delivering this can’t be understated
“90% of oil and gas reserves lie in Scottish waters. It is vital that those policy and decision makers responsible for taxation and regulation of the sector are located in Aberdeen where development of the industry is properly understood. We can then ensure the delivery of a sector that is responsive to those most impacted by it.
“Hugely increased collaborative effort between all major stakeholders, the government, operators and public sector, in the delivery of a long-term oil and gas strategy is vital to ensure that the economic potential of Scotland’s remaining reserves is maximised. And it is critical that this is done immediately.”