The House of Commons’ Energy and Climate Change Committee published its UK Offshore Oil and Gas Report on 30 June 2009. The report sets out the Committee’s recommendations to the Government. The Government is expected to issue a response within two months.
The report argues that the Government’s priority should be security of supply, while at the same time moving to a low carbon economy. The Committee recognises that the UK oil and gas industry faces a “quadruple whammy” of high costs, low prices, lack of affordable credit and a global recession. The Committee calls for the Government to support UK oil and gas production in light of the immense tax revenues paid by the industry and the 350,000 people whose employment depends on its survival.
The Committee supports the industry’s recommendations for more wide-ranging and generous reforms of the fiscal regime, such as considering the effects of a capital uplift or a reduction in the supplementary charge, and incentives to develop the reserves west of Shetland. The Committee is, however, concerned that the current access to infrastructure arrangements are not working well in practice. Looking to the future, it recommends that Government formulate a working carbon capture and storage policy and assess the export potential of the UK oil and gas industry.
The report addresses and makes specific recommendations on the following issues:
Maximising UK oil and gas production
The report notes that domestic reserves will remain the single and most significant contributor to the UK’s security of energy supply for at least another decade. Estimates of future levels of UK oil and gas production range from 11 billion barrels of oil equivalent (boe) to 37 billion boe. The Committee recommends that Government articulate a strategy to maximise their recovery, with realistic but stretching targets for future production levels.
The Committee is “very concerned” at the bleak prospects for investment in the oil and gas industry. In the worst case scenario, 50,000 jobs could disappear in 2010 and production could fall significantly. The Government must do what it can to facilitate investment. While the report notes that the Government is engaging with banks to ensure that the UKCS is “at the forefront of the minds of the banks”, it concludes that “it does not seem that such engagement is having any conspicuous success”.
The Government should set out how it intends to help oil and gas companies access affordable credit from banks and keep under review the availability of such credit. Even more importantly, the Committee calls for the Government to establish a fair and sustainable fiscal regime.
The fiscal regime
The Committee welcomes the field allowance and other fiscal measures announced in this year’s Budget, but concludes that they are not sufficient incentives for the sector to deliver the extra two billion barrels of oil hoped for by the Chancellor. The report notes industry’s concerns that the field allowance does not incentivise incremental investment in existing sites and that the qualifying criteria are too stringent, especially regarding high pressure/high temperature (HPHT). According to submissions provided by industry players, only one HPHT undeveloped discovery in the North Sea satisfies the criteria.
The Committee considers these concerns to be “genuine and legitimate” and suggests that Government review the operation of the field allowance in its first year of operation and be prepared to extend its scope and qualifying criteria. The Government should at the same time reconsider the merits of introducing an across-the board capital uplift or a reduction in the supplementary charge, by calculating the effects on both tax revenues and investment levels. The Government should also estimate the costs and potential benefits for accelerating the payment of accrued but unrelieved tax allowances to smaller companies.
The report notes that the banking crisis has exposed the need for a wider range of decommissioning securities, with banks limiting the size or denying securities altogether. This is compounded by the requirement to post letters of credit on a pre-tax basis, which reduces the funds a company has available for investment. The Committee hopes that the ongoing Government consultation on the tax treatment of decommissioning securities will address these issues, but may return to the matter if it is not satisfactorily resolved.
West of Shetland area
The report notes that the area to the west of Shetland and the Hebrides holds around 17% of the UK’s oil reserves and 10 to 15% of the remaining UK gas reserves but is difficult to exploit. To address this, the Committee suggests that all fields west of Shetland should be eligible for the field allowance. It also calls for a more active role to be played by the Government in establishing a common carrier arrangement for oil and gas west of Shetland, whether through regulation or assistance with funding. The Government should ensure the industry’s prompt agreement on both the timescale for building the infrastructure and the arrangements to govern its use.
Access to infrastructure
The Committee reports that smaller companies are having difficulties at accessing the infrastructure required to produce oil and gas due to, in some cases, “unrealistic demands by infrastructure’s owners”. It concludes that the industry’s voluntary Infrastructure Code of Practice is not working well. The Committee recommends that the voluntary arrangements are made more effective and, if this fails, that serious consideration should be given to introducing a common carrier system. The Committee suggests that Government take a more active role in ensuring the successful outcome of infrastructure access negotiations.
Environmental impact
The Committee recommends that Government fund a survey of the marine environment and its wildlife west of Shetland, as well as facilitating a systematic and ongoing plan of surveys of marine wildlife in the UKCS to fill in the gaps left by previous surveys.
The future - moving to a low carbon economy
The Committee welcomes the Government’s initiative in the area of carbon capture and storage, which offers an opportunity to use existing infrastructure and skills in the North Sea. It suggests that Government maintain a close dialogue with industry to ensure that the carbon capture and storage licensing regime works. The Committee will publish a separate report on ‘low carbon technologies in a green economy’ later this year.
Finally, the Government should assess the potentially considerable export potential of the industry that supports the UKCS.
For the full report please click here
