As Brent Crude continues to tumble in price the industry had hoped for some relief in the form of tax breaks in Chancellor George Osborne’s Autumn Statement last week.
But the 2% cut from 82% to 80% – the first for the United Kingdom Continental Shelf (UKCS) for 21 years, producing a £450m windfall – left most feeling deflated.
However, the following day Danny Alexander, Chief Secretary to the Treasury, said the Government was looking to overhaul the field allowance and fiscal regimes, which would provide financial support for seismic surveys and reform the fiscal treatment of infrastructure.
Dennis Clark, chairman of Newcastle-based fabricators the OGN Group, which employs 1,000 people in the region said: “Will the tax cut lead to new investment in the North Sea? No. And will it lead to increased exploration? No.”
However he continued: “We are heading in the right direction, there has been some modest good news and it’s probably all the industry could have expected in present circumstances. The Treasury and Government are now focusing on the right things.”
Mr Alexander told industry leaders last week: “The days when the Government regarded the North Sea primarily as a means of raising revenue are over.
“You are first and foremost a vitally important economic asset which supports jobs and investment, and one in which we will do whatever we can to support, so we can meet our shared objective of squeezing every last drop we can out of the North Sea.”
He said the tax cut was a “vitally important signal that the North Sea is open for business”.
He added: “To reassure you, we will not stop there. As soon as fiscal conditions permit, we are committed to lowering that rate further in a staged and affordable way to get more investment and encourage greater production.”
Oil & Gas UK chief executive Malcolm Webb welcomed his words. “A spirit of co-operation is very much in evidence. We are encouraged to note that fiscal policy will now be framed in the context of the sector’s wider economic benefits and will also take account of the global competitiveness of the industry in terms of commodity prices and costs.
“We are encouraged by these proposals but must now swiftly act on them given the current challenges facing the industry,” he said.
One of the industry’s leading surveys published last month showed that confidence on the UKCS had fallen to a six-year low on the back of declining production levels, record low exploration levels, and rising costs.
This comes as many of the Aberdeen-based major oil producers, contractors and service companies are looking at job cuts or have already made some.
The findings, from the 21st bi-annual Oil and Gas Survey, conducted by Aberdeen & Grampian Chamber of Commerce and sponsored by law firm Bond Dickinson, and reported two-thirds of these companies wanted a review of the tax system.
Oil and gas companies are the most heavily taxed in the country. Some fields are taxed at 81% - this includes corporation tax of 30%, a supplementary tax of 32% and a further tax on those fields started before 1992 of 19%.
The Chancellor’s first Budget in 2011 increased the supplementary rate from 20% to 32%, without consultation, prompting outrage from the industry.
Perversely this set in train a chain of events which has culminated in an unprecedented level of co-operation between Government and industry.
It led to the Wood Review which recommended the creation of a new regulator – the Oil and Gas Authority – to ensure all is done to maximise recovery of the remaining reserves estimated at somewhere between 15 to 21 billion barrels of oil equivalent.
A further fallout from the 2011 tax raid was the introduction of a number of field allowances, and this had prompted a record phase of investment spurred on by an oil price of over $100 a barrel.
But since June the oil price has fallen by over 40% to less than $70, demonstrating once more the cyclical nature of the industry.
In the downturn, jobs and investment are cut as operators and contractors look to take costs out.
Costs in the North Sea have risen by over 50% in the last few years with the nature of the basin changing as oil companies target smaller, more technically challenging fields.
Neil Kirkbride, managing director of Newcastle-based supply chain BEL Valves, also sits on the board of Oil & Gas UK. He said: “It’s a good first step and encouraging shift in the right direction.”
Mr Kirkbride said that its order book was stable after a few years of strong growth and it is continuing with its investment plans including a new subsea centre on Tyneside.
He said: “Booms can lead to inefficiencies and the industry is going through a period of re-adjustment which is taking some of the heat out of the market.
“There is a renewed emphasis on cutting costs and Oil & Gas UK is looking at ways in which some technologies can be standardised.”
Andrew Esson is managing director of North Tyneside-based supply chain company Quick Hydraulics. It is still growing rapidly, having opened an Aberdeen office recently after sales in the Scottish city grew from zero to £500,000 in the space of two years.
He said: “There is still a strong pipeline of work but we are anticipating a slowdown. In many regards the market has been out of control and costs have soared. This has been made worse by a chronic skills shortage.
“I remember oil being priced at less than $80 a barrel in the last decade and there was still growth.
“While the industry was underwhelmed by the Autumn Statement tax cut, the Government is moving in the right direction.”
One of the most worrying aspects on the UKCS currently is the lack of exploration with the number of wells drilled falling to record lows.
Mr Clark added: “Even with oil at over $100 a barrel there has not been the appetite for drilling.”
However Mr Alexander said it was looking into establishing a regime similar to that in Norway where exploration is made attractive for all companies, by enabling them to claim immediate tax relief for the costs of an exploratory well.
While production taxes are high in Norway, at 78%, oil companies benefit from a 78% rebate on every dollar spent exploring in Norwegian waters.
This means they are able to offset the costs of drilling a dry well, whether they have taxable income or not, whereas UK companies can only offset the costs of a dry well against taxable income.
Mr Clark added: “Many of the companies are spending hundreds of millions on maintaining their infrastructure, and if we cannot encourage more drilling, then by the time we get round to it the existing infrastructure may not be up to it.”
Reflecting on the cyclical nature of the industry Mr Clark, one of the North East’s industry veterans who established leading supply chain organisation NOF Energy in 1988, said this is the fourth cycle he has experienced.
He said: “In the 1980s the North Sea needed an oil price of $20 a barrel to break-even but now it’s up to $50 or $60.
“While costs have risen there is still a lot of oil to recover. The economics have changed again over the last few months and it’s now down to us in the industry, with some help from the Government, to keep the North Sea healthy.”