When George Osborne takes his place at the despatch box tomorrow, the UK oil and gas industry will be listening with interest – not least because this Budget takes place less than one month after Sir Ian Wood’s UKCS Maximising Economic Recovery report was accepted by the UK Government and widely welcomed across the sector.
So the chancellor has an early and golden opportunity to send a signal through the fiscal regime of the importance of HM Treasury, the regulator and the industry working together to unlock the full potential of the UK North Sea – reinforcing the new spirit of partnership that Sir Ian has outlined.
As the latest activity survey from Oil and Gas UK makes clear, the UK North Sea remains an area of great opportunity, but also of significant challenge. The sector continues to put its money where its mouth is, with a record £14.4billion in capital expenditure last year and an estimated £13billion in 2014.
At Maersk Oil UK, if our investment plans are delivered on time, we may invest around £1 billion over the next 12 months. So there is confidence in the basin.
But there are also significant challenges, the greatest of which are exploration and cost escalation. How do we keep on replacing the barrels we are producing? Exploration over the past three years has been lower than at any time in the history of the UK Continental Shelf. A lot of work is happening to find solutions, not least through the PILOT Exploration Task Force.
But government needs to provide enablers of activity, and the fiscal regime is a strong lever. There is also the question of operating costs. These continue to rise, making the economics of some fields less attractive and potentially bringing forward the decommissioning of producing installations – and once they go, so too does any chance of recovering the oil and gas left in surrounding areas.
There is recognition of the job to be done in making the most of the remaining potential. Delivering this is largely down to the operators, suppliers and service companies who carry out and support the exploration, production and asset integrity activities that ensure the UKCS is a safe and globally competitive environment for oil and gas production.
What kind of signals would be welcomed? For me, action on one or both of the two main challenges which need to be addressed would set a very positive tone as industry, HM Treasury and the new regulator begin to work together to deliver Sir Ian’s recommendations. It’s clear the field allowance regime has been a success in incentivising particular types of development – particularly brownfield activity and smaller fields. Sir Ian’s report points towards the importance of creating future hubs or ‘cluster’ developments to fully capture economic potential beyond simply a field by field basis. The fiscal regime could enable this vision by providing a fresh incentive structure to develop new hubs by de-risking certain high-risk developments.
Rising operating cost is the other future area where a tripartite solution can be found. If industry, government and the new regulator wish to extend the life of installations to maximise economic recovery, there is a shared interest in finding a mechanism to provide support for the substantial financial outlays required.