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UK oil & gas sector at critical crossroads, says expert commission

07 July 2014

An independent expert oil and gas commission set up by the Scottish Government has determined that radical fiscal and regulatory change is an absolute necessity to ensure that the remaining hydrocarbons on the UK Continental Shelf (UKCS) are fully exploited in order to deliver the maximum economic contribution to the nation.

The Oil and Gas Expert Commission was tasked with exploring how the total value of the whole industry can be maximised with an emphasis on ensuring the sustainable future of the UKCS. The recommendations in the report are intended to provide direction to Government in shaping future policy, irrespective of the outcome of the referendum.

Chairman of the commission Melfort Campbell said: “The over-riding message is that we must no longer assess the value of the UKCS on tax take from production profits but on the total value generated in the economy. The result of doing this should lead to the recovery of the highest reserve estimates – around 24 billions of barrels oil equivalent (Bboe) – and maximum value generation for the economy. This does however require us to fully understand and accurately quantify the total value added, where and how it arises and how it is impacted by tax and licensing conditions.”

The Commission’s report warns that the industry has reached a critical crossroads with the current record levels of investment masking the significant decline in investment in both exploration and development activity which will inevitably result in markedly reduced activity harming both future production levels and total recovery.

It concludes that a step-change in stewardship philosophy, largely through an overhaul of the fiscal and regulatory regimes, is urgently needed to achieve maximum value, recovery and longevity from the remaining life of the UKCS.

The immediate challenge for Government, says the report, is to steer a clear path towards a targeted fiscal policy framework which is stable, predictable and internationally competitive. This needs to be aimed less at taxes on production but more at achieving a balanced tax take across the entire industry and maximising the total value generated in to the wider economy by produced hydrocarbons. 

Mr Campbell said: “Within the current regime and climate of declining investment, we are seeing inadequate returns for operators, significantly reduced income for the Treasury and the loss of the added value through the supply chain and into the wider economy.
The Commission concludes that Government must recognise that policy must swiftly change from seeking to control access to a sought-after resource to one where investment has to be attracted by positive features.

“In other words, the UKCS used to be like an exclusive nightclub with bouncers on the door only allowing celebrity VIPs access. Now, it is more akin to a trattoria with waiters touting for business on the pavement outside,” explained Mr Campbell.

The fact that that virtually every development in the UKCS needs a tax allowance means the tax rates are too high and too complex, added Mr Campbell: “There is a need for clarity and visibility of a tax regime that will become, and then stay, competitive in global terms, attracting investment in even the more difficult and expensive fields from exploration through to consolidation of decommissioning certainty.”

The remaining resources in the UKCS are estimated to be between 10 and 24 Bboe. The Wood Review focuses on maximising economic recovery and a new model of stewardship to deliver it and this provided the starting point for the Commission’s report.

Mr Campbell said: “The Wood Review, with the creation of a new regulator, provides the means for creating the opportunity but we can only make the most of that opportunity if we focus on total value added,” said Mr Campbell. “We must further develop the industry to enable optimal recovery, create centres of excellence through bringing together skills development, R&D, technology development and supply chain capability that not only enables and profits from production of the maximum 24 Bboe but ensures that UKCS supply chain capability is in demand in every province around the world.”

The commission strongly believes that a dual approach for delivering maximum economic recovery and generating maximum total value added must set the agenda for Government, the new regulator and industry to ensure that the UK, or a separate Scotland and rest of UK jurisdictions, take action quickly to maximise the full potential of the UKCS.

The Oil and Gas Expert Commission was asked to:
•  Consider specific proposals for providing long-term fiscal stability and predictability for the oil and gas industry in an independent Scotland.
•  Consider any appropriate amendments to improve the fiscal regime. This should be consistent with the Scottish Government’s objective of delivering a tax regime that supports production. As part of this, the Commission will consider evidence on other types of marginal projects in Scottish waters that might require additional fiscal support in the future.
•  Consider options to increase competition and reduce entry barriers in the UKCS, including options to support exploration activity by both new entrants and established operators.
•  Consider specific arrangements for the North Sea licensing and regulatory regime in an Independent Scotland and, in consultation with the industry, examine options available to enhance the existing regime.
•  Examine, in consultation with the industry and other stakeholders, how the fiscal framework in an independent Scotland will provide certainty for operators in regards to decommissioning.
•  Consider potential implications arising from the transition to separate Scottish and rUK jurisdictions for taxation, licencing and the offshore regulatory regime, to ensure that it will not have any adverse impact on the sector.

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