- Fiscal reform should be number one priority for oil and gas sector, says industry report
- Confidence in North Sea activity at a six-year low
The urgent need for the Chancellor to provide a tax break for the North Sea oil and gas industry in next week's Autumn statement is demonstrated by a new report published today showing a sharp decline in confidence in the sector.
The findings, from the 21st Oil and Gas Survey, conducted by Aberdeen & Grampian Chamber of Commerce and sponsored by law firm Bond Dickinson, reveal that for the first time since 2008, more operators and contractors are pessimistic about their UK Continental Shelf (UKCS) activity than are optimistic.
Almost two-thirds of all firms surveyed (62 per cent) believe the government's top priority with regard to the sector should be a revision to the fiscal regime to ensure it encourages exploration and extraction.
One respondent explained that "a sliding scale tax on mature declining fields would extend the economic date for cessation of production [and] improve the investment case for development of mature fields." Another warned that "if we don't maintain or increase the level of exploration and extraction there will be no meaningful business in 20 years."
Seventeen per cent of firms believe the government's top priority should be developing a strategy for implementing Sir Ian Wood's "Maximising Economic Recovery" recommendations, and nine per cent believe improving collaboration within the industry should be the number one priority. The creation by government of a new regulatory body funded by industry is top of the agenda for five per cent of companies in the sector.
The importance of the content of the Chancellor's forthcoming announcement supports a recent report by Deloitte suggesting that oil and gas firms could be delaying key decisions until after the Autumn statement. The report revealed that there were just four offshore deals announced in the third quarter of this year, down on 14 in the same quarter in 2013.
Uisdean Vass, oil and gas partner at Bond Dickinson, said: "This survey provides a stark warning for the Government. Confidence is at its lowest since 2008. Costs are making exploration and production in the UKCS, relative to other petroleum provinces worldwide, increasingly less economical, exacerbated by low oil prices and high tax rates ranging from 62% to 81% paid by producers in the UKCS.
"It is vital that a high level of activity is maintained in the North Sea because, as well as its direct importance for employment and the economy, it is a testing and training ground for personnel and technology which are exported around the globe. Not addressing problems now could mean thousands of jobs will be lost to Scotland in the years ahead."
James Bream, research and policy director at Aberdeen & Grampian Chamber of Commerce, said: "This year, we have seen a record survey response – that and the results highlight the critical situation in the North Sea. In a mature basin like the UKCS, the industry must cut costs, innovate and increase collaboration, but it cannot work in isolation of Government and a consistent, fair and stable tax regime is crucial.
"Companies are not convinced they can get a fair return on their investment and in a global industry, it is very simple for them to move their capital elsewhere. The Government must be aware that decisions in the next few months will also have a major impact on the £35billion supply chain that exists in the UK.
"We feel that this cut in the tax rate would create a new level of trust and would act as a clear statement of intent from the Government that they are committed to maximising economic recovery from the UKCS."
Activity levels & business confidence
The survey shows that 15 per cent of firms are more confident about their UKCS activity than a year ago, while 46 per cent are less optimistic. This is a sharp decline in optimism from the levels seen over the past two years.
Less than half of respondents (49 per cent) are working at or above optimum levels in the UKCS, the first time the majority of firms have been working below optimal levels in the UKCS for three years.
An increasing number of contractors (71%) say that they believe they could be involved in decommissioning activity in the next three to five years, the highest level since 2011.
The report also reveals that almost a third of contractors (29 per cent) are currently involved in renewables work, broadly the same as a year ago. However, confidence in the future of their involvement in renewables has dipped, with just 44 per cent of contractors expecting their involvement to increase in the next three to five years, down from 51 per cent this time last year.
James Bream continued: "We must aim to avoid premature decommissioning which will cost the taxpayer, reduce revenues to government and have an impact on our energy security."
More than half of operators (57 per cent) and contractors (54 per cent) reported increases in their total number of employees in the past year, with a particularly strong demand for permanent staff.
The survey reveals a move towards permanent staff, with half of operators (50 per cent) reporting a reduction in contract staff in the past year and almost two-thirds (64 per cent) expecting a further reduction in the next 12 months.
Average pay increases have remained strong with a 3 per cent increase for operators in the past 12 months and a 5.1 per cent increase for contractors, well above general national employment trends. The main reasons given for instigating pay increases were the need to retain key staff (74 per cent); a shortage of key skills (41 per cent); and the cost pressures of operating in the local economy (39 per cent).
For Information and To Download the Report: http://www.bonddickinson.com/news/north-sea-oil-an...