North Sea oil 'on a knife-edge' conference hears on offshore sector

Conference hears fears for future of offshore sector - but says companies in the North East could provide the solution

Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit
Chief Executive of Oil & Gas UK Malcolm Webb speaking during the Summit

The major oil companies are committed to the North Sea despite some of the critical issues facing the industry, an Aberdeen audience heard on Monday. Peter McCusker reports.

Malcolm Webb, outgoing chief executive of Oil & Gas UK, sounded a dire warning ahead of the coming Budget.

“We all know the tax burden needs to be reduced in the Budget and this may be the final chance to implement these changes. If not enough is done then many will quietly turn away and invest elsewhere.”

Speaking at the Aberdeen Conference and Exhibition Centre on Monday, Mr Webb said the oil price collapse has exposed some major structural problems affecting the North Sea industry.

“Don’t delude yourselves, there were real problems in the industry before the price fall. Costs are unsustainable, rising by 45% in the last three years, and many companies now have deeply negative cash flows.

“We can survive and prosper but drastic measures are required. The UK has a reputation for instability in the tax regime and this needs to change,” he said.

The issues facing the United Kingdom Continental Shelf (UKCS) prompted the Government to initiate an independent review into the industry.

This was conducted by Aberdeen industry veteran Sir Ian Wood and one of his main recommendations was the creation on a new regulatory body, the Oil and Gas Authority (OGA).

This comes into formal being on April 1, and its new chief executive Andy Samuels was quizzed by one US delegate on whether the measures touted in the Budget, such as the tax cut and a new basin-wide investment allowance, would be effective.

Mr Samuels said he believed they would, and went on to say despite the falling oil price the UKCS has a long and successful future ahead of it.

“The North Sea is an ongoing proposition and there is no need to panic. The clear message is that we are open for business and we can work together.

“The majors are in for the long-haul. They can see a long term future in the basin, but want to see some major efforts to sort out costs and make the basin more competitive.”

He went on to highlight some of the issues, including rising costs, ageing assets and a dire lack of exploration.

He said: “A 20% year on year rise in operating costs over the last decade is not acceptable.

“This is leading to negative cash flows and cannot be sustained over the years. Some parts of the basin are on a knife edge.”

Mr Samuels said there needs to be changes in behaviour, culture and leadership and went on to say the companies in the North East could provide the solution to many problems (see panel).

He said: “There has to be fiscal incentives in the Budget and the Wood Review needs to be implemented in full.”

Then added: “The OGA will be layer-light. There may be some tough love but it will serve the industry and will aim to encourage a new era of industry-wide collaboration.”

Mr Webb and Mr Samuels were amongst a wide-ranging cast of politicians, academics and industry figures at the specially-convened oil and gas summit.

Fellow speaker Rt Hon Alistair Carmichael MP, Secretary of State for Scotland, echoed Mr Webb’s sentiments.

“This is a downturn unlike any other. This is now a mature basin and there is no guarantee it will bounce back so we need to tackle this differently from the ones in the past.

“If we do not respond appropriately we may reach a point where, especially in the north North Sea, operators will look to decommissioning, despite having years of productive life left.”

In next month’s Budget the industry is pressing for the Supplementary Tax charge of 30% to be abolished, leaving oil companies to pay 30% Corporation Tax on profits, which would still be 50% above what other UK businesses pay.

In last December’s Autumn Statement the Government cut this charge by 2% from 32% and there are indications it is listening to the latest industry lobbying.

Mr Carmichael would not be drawn on this speculation but confirmed the Government is looking to ‘reduce the tax burden to further to encourage investment.’

Mr Webb said: “We need 80 new exploration wells a year to ensure we are feeding the hopper for future, but this number dropped to 10 in 2011 and has not recovered since. This is a huge, huge challenge.”

With most of the major oil companies cutting jobs in their North Sea operations and further cuts expected The Rt Hon Nicola Sturgeon MSP, First Minister of Scotland, highlighted the creation of a jobs task force, which met last week.

One of its aims is to ensure that that any apprentices at danger of being laid off will find work elsewhere in the industry.

She went on to highlight the industry strengths including a 22% increase exports last year and its world-leading expertise in subsea, safety and asset integrity.

But added: “We need to act now before the Budget to improve the tax regime or we are at risk of premature decommissioning.”

Professor Alex Kemp of the University of Aberdeen said its research showed that that a 15% cost saving initiative, coupled with oil at $70 a barrel, should boost activity, and this would be boosted further with a cut in the Supplementary Tax.

Dave Stewart, UK managing director of the Wood Group, one of the industry’s major employers, quizzed John Taylor, regional organiser for the Unite union, on current industry working practices.

He asked him whether he thought the current working arrangement whereby offshore workers have two weeks on and three weeks off - equating to a 20-week working year – are acceptable in the current climate.

Mr Taylor expressed his frustration at how some workers had been made redundant without any consultation and called attempts to change shift patterns a ‘disgrace’.

Mr Webb added: “The 10% haircut we are currently seeing will not do us; we need a 30% to 40% improvement.

“Exploration fell off a cliff in 2011 when the Governemnt introduced the new supplementary charge. Appraisal wells last year were almost zero; this is not a good place to be.

“We saw 2017 as being a cliff edge for investment but the lack of exploration and falling oil price mean it has now moved forward.”

He went on to say the oil majors are still sanguine about their plans but the smaller operators are more concerned about recent oil price falls.

He said there is expected to be a further large spend on operational expenditure this year, following spending of £10bn in each of the last two years.

An estimated 470,000 people are currently employed in the UK oil and gas industry, including over 60,000 from the North East.

After 50 years of operation, almost 40 billion boe (barrels of oil equivalent) have been recovered from the UKCS, with up to 20 billion boe left.

Andy Samuels, the chief executive of the recently established Oil and Gas Authority (OGA), believes the North East supply chain is a ‘large part of the solution to the problems’ facing the UKCS.

He said: “I would encourage them to keep on being inventive. They have some wonderful ideas and we are keen to hear what they have to say.”

He says he had recently spoken to a North East company, with a back to basics approach to drilling, which is both safe and efficient, and can radically reduce costs.

“It’s essentially a no-brainer with a quick pay back. They tell me they have previously struggled to find the right people at the right level in the operating companies, but I’m able to put them in touch with those people,” he said.

When it comes to the paucity of recent drilling activity on the UKCS Mr Samuels says it’s not merely a case of additional fiscal incentives.

“We need to act in the same way as the Norwegian national oil company and play a more active role.”

He cited the example of a company whose unsuccessful well was due to poor basic analysis prior to drilling, and says more needs to be done with Government and companies to ensure the right seismic data is available to all.

Mr Samuels said parts of the basin are on a ‘knife edge’. He elaborated: “If one operator shuts down a platform this could have a knock-on, domino effect on those operating nearby.

“We want to encourage behaviour which is in the interests of the long term future of the basin. Sharing infrastructure is something we also have to look at and the industry needs to be part of the solution.”

With this is mind Mr Samuels said he is expecting to divide the basin into three regions and appoint E & P (exploration and production) director to oversee each one.

Mr Samuels brief is to press ahead with the 29 recommendations included in the Wood Review and due to acute nature of the current crisis Energy and Climate Change Secretary Ed Davey has asked him to come up with some initial measures later this month.

One of the key Wood Review recommendations is to encourage greater collaboration, and Mr Samuels has already seen this collaborative working in evidence.

He said: “There were some recent issues over fuel gas and the operators have been working to find a solution in a way which is quite different to the normal, and this is the kind of behaviour I would expect going forward.”

He added: “We have been pleased with the response of the operating companies so far. The managing directors are on-board with what we are trying to achieve and there has been no push back.”

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