Today's Budget is crucial to the future of the North Sea, and the offshore industry is preparing itself for the challenges that lie ahead as last week’s NOF Energy conference heard. Peter McCusker reports.
HOPES are high that there will be some positive new for North Sea oil and gas in today’s Budget – and the industry needs it.
Exploration has recently fallen to record lows and in an era of falling oil prices investment is being slashed and jobs cut.
The industry’s new regulator says the basin is on a ‘knife-edge’ and capital expenditure could plummet from last year’s record £14.8bn to £2.5bn by 2018.
Oil & Gas UK met Chancellor George Osborne last week to highlight its concerns and Energy Minister Matthew Hancock indicated help could be on the way.
Addressing NOF Energy’s annual conference Energy: A Balanced Future at the Sage Gateshead, Mr Hancock said: “This year we’ll be celebrating the 50th anniversary of one of the UK’s greatest industrial success stories, 50 years since BP discovered natural gas when it drilled the West Sole prospect in the Southern North Sea.
“Since then 42bn barrels of oil have been recovered so far, and with another 20bn or more to still be drawn from our mature basin it’s clear that oil and gas will form an integral part of the UK energy mix for decades to come.
“We are committed to helping investors deliver on this. The North Sea may be maturing, but it still has many advantages and remains an enormously attractive place to invest.”
Taking questions from the floor, Mr Hancock reflected on the recent fiscal review of activity on the United Kingdom Continental Shelf (UKCS) undertaken by the Treasury.
He said: “We are in an unusual position, with record levels of investment and positive investment decisions but low levels of exploration.
“Many have cited the example of Norway and how it supports its exploration. This is a point many have been making during the fiscal review.
“If we can get that right, and that it’s exactly what we are looking at. It’s exactly what the fiscal review has asked itself.”
He added: “I can’t speak on behalf of the Chancellor but I expect next week’s Budget could show how committed we are to supporting this industry.”
In his address Paul Charlton, chairman of NOF Energy and chief executive officer of Hexham-based supply Chain Company PDL Solutions said: “The industry needs urgent Government action to create a simplified investment allowance, it needs a reduction in the supplementary charge (tax rate) and support for exploration.”
Mr Charlton says the industry is entering a new era and supported the sentiments of Talisman Sinopec managing director Paul Warwick who recently said; ‘We need to renew ourselves now, so we are ready for the next 30 years’.
Mr Charlton continued: “We are looking at total reinvention, adaption and change. There needs to be a step change, one where operators and the supply chain work together to collaborate and share.
“The industry needs to be open to new ideas. The race to be second, which has been endemic, needs to be broken and we need to support the supply chain develop disruptive technologies.
“The future is one of threats and opportunities and NOF will take the opportunity path. The future is one of open and closed doors and we aim to open those doors and welcome the challenges and opportunities of the next 30 years.”
Nigel Lees, regional director for strategy and growth at Wood Group PSN, one of the world’s largest oilfield services companies, highlighted how North Sea costs had been allowed to run out of control.
He said: “The signs have been there for some time, for three, four or five years. We have to ask ourselves did the industry get value for money from the £14.8bn spent last year?
“Lifting costs in the UK have risen more quickly than anywhere else in the world, and if growth in costs continues at the current rate by 2020 the cost of production will be £60 a barrel. That is clearly not a position the industry can afford to be in.”
He went on to say the uncertainty of the Scottish Referendum, the upcoming election and the Budget had impacted on investor confidence and that the industry and Government had to work together to secure its ‘long-term sustainability’.
He continued: “The OGA (Oil and Gas Authority) was an immense step. It shows the Government is fully behind the industry and we need to now step up to the plate. It was a call to action and a signal to the industry that it’s time to collaborate.”
Mr Lees said the industry needs to drive improvement across all cost areas, including logistics and staffing as well as supporting an increased focus on standardisation and a move away from costly, bespoke solutions.
He said the industry needed to show ‘humility’. “We have to change and talk to the supply chain,” he said.
“Decommissioning is estimated to be £40bn business but we should aim to make it a £20bn by being more efficient in what we do,” he declared.
Mr Lees said integrity and maintenance are vital to the future of the UKCS and that new wells are the lifeblood as they drive focused expenditure
While acknowledging the impact of the falling oil price on the North Sea basin, he said: “This is good news story, one about re-invention and transformation, of securing employment and creating the right energy mix.
“The industry is not dead. It is important to securing the feedstocks for industry, to investing in infrastructure and reducing CO2 emissions.
“We have a social responsibility to the people of the UK to recover as much oil as possible.”
Mr Hancock went on to speak about the challenges that lie ahead.
He said: “The falling oil price has already led to job losses and this is a worrying time for those who care about the industry. As a Government, we’re determined to do everything that we can to help, and will work in partnership with stakeholders to provide all the support we can for those affected by losses.
“Already good progress is being made in the establishment of the OGA under the leadership of Andy Samuel. He will have a big task. As the OGA’s own Call to Action report which was published on February 25 identified, there are two key risks requiring urgent focus: the risk that the profitability of producing fields will be insufficient to attract continued investment, leading to premature decommissioning of assets and the risk that confidence in the future potential of the UKCS will continue to decline, resulting in the critical long-term investment not being committed.
“These are stark warnings, and it is vital that Government, industry and the OGA work together to deliver.
“We’ve already introduced a range of fiscal measures to stimulate further investment in the UKCS. These measures have been successful, with almost half of the record £14bn investment in 2013 incentivised by field allowances.
“And we all look forward to the Budget next week.”
Speaking ahead of the Budget, George Rafferty, chief executive of NOF Energy, said: “The industry has made strong representations to the Treasury regarding the fiscal regime in the UK oil and gas sector, which we support, and we hope they are heard. Most significantly there is the need for investment allowances that encourages exploration.
“Exploration is crucial to securing the future of operations in the UK North Sea as it is the catalyst for the entire industry from the recovery of resources through to programmes of decommissioning, all of which involve the support of a technology-led supply chain.
“The importance of the energy industry to the UK economy is multi-faceted and it’s essential for the Chancellor to continue to recognise this in his Budget.
“In addition to making sure the lights don’t go out, the industry makes considerable contributions to the Treasury. This is both in terms of the tax-take from recovered resources, but also from the several thousand companies in the supply chain, and the tens of thousands of people they employ that contribute to the economy thanks to their skills, products and services that are delivered in the UK and exported around the world.”
The afternoon session of this year’s conference featured a panel debate which considered how the UK should strive to develop a more diverse energy mix,
Jon Gluyas, Dean of Knowledge Exchange at Durham Energy Institute, said capacity reductions in the UK, due to the closure of fossil fuel power plants, was leaving the country vulnerable to potential blackouts or brownouts.
Prof Gluyas highlighted how 40% of our coal imports now come from Russia and how we are a nation which now imports most of our natural gas. The panel agreed that this posed problems for our energy security and meant we needed to develop new energy sources.
Ken Cronin, chief executive office of UK Onshore Oil & Gas, said we need to concentrate on developing a balanced energy mix, which should include our abundant shale gas reserves.
Luke Warren, chief executive of the Carbon Capture and Storage Association, described carbon capture and storage as a huge opportunity for the UK in helping to reducing CO2 emissions,
Brent Cheshire, chairman of DONG Energy in the UK said the increasing contribution of offshore wind and other renewables will boost energy security, and he highlighted how there are now tangible signs of meaningful cost reductions in offshore wind.
Earlier in the day Keith Parker, chief executive officer, of the Nuclear Industry Association, said the nuclear industry is on the ‘cusp of a new era’ in the UK.
Reflecting on the conference, George Rafferty, chief executive of NOF Energy, said: “Energy: A Balanced Future was a fantastic forum to debate, discuss and engage with the issues facing the industry across the established oil and gas sector through to emerging and future resources that will all have a role to play in ensuring a balanced energy future.
“The feedback we have received has been exceptionally positive and reflects the current feelings of our members towards the industry. In the face of the negative outlook portrayed by some, our members are showing realism rather than pessimism about the future.
“This is an opportunity for a programme of correction in the industry to address rising costs and maximise the recovery of resources and generation of energy. Our members have a key role to play and the conference was an excellent showcase for the disruptive and innovative solutions developed to support the industry’s evolution.”