A radical reshaping of the North Sea’s tax regime combined with a major cost-cutting drive is required if the UK’s oil and gas industry is to regain ground lost to international competitors.
Trade body Oil & Gas UK today publishes its activity report for 2015 – a document it says provides “striking evidence of how rising costs, taxes and inadequate regulation have taken their toll” on the sector’s global competitiveness.
The report states urgent tax reforms are needed in order to secure new investment and address a collapse in exploration during 2014.
The group fears the number of spuds could fall into single figures in 2015 and is concerned that hundreds of thousands of jobs may be placed at risk if major reforms of the UKCS fiscal regime aren’t implemented swiftly.
“If the challenge facing our industry was significant when oil was at $110 per barrel, the scale of the issue has greatly escalated with the oil price collapse. Whilst some progress has been made, the pace and extent of change for all of them has not been sufficient,” OGUK chief executive Malcolm Webb said.
“Industry recognises that its cost base is unsustainable and has been taking steps to reduce its costs and improve efficient. However, it will take time for this to achieve a substantial impact and, unfortunately, the cost of operating the UKCS has continued to rise from £8.9 billion to £9.6bn in 2014.
“This report demonstrates that cost reductions of up to 40% per barrel of oil equivalent must be achieved to secure a sustainable future for this basin.
“This can be done but only through combining major effort on cost reduction, production improvement and fresh investment. We must get the balance right between investment and cost control. Cost cutting alone will diminish this industry.
“To survive, we must sustain investment, which is why this province is in urgent need of significant regulatory and fiscal reform.”
The report found production fell by 1% in 2014 to 1.42 million barrels of oil per day equivalent and revenues declined to £24bn, the lowest level since 1998.
Capital investment during the year rose to £14.8bn – a total inflated by cost over-runs and project slippage – but the figure is expected to fall to between £9.5bn and £11.3bn this year.
Fourteen of 25 expected wells were drilled during the year while the cost of production rose to a record high of £18.50 per barrel.
Mr Webb said the industry was facing “exceptional challenge” with little fresh investment and a lack of new projects being generated.
“Both the British and Scottish Governments have recognised in their industrial strategies that the value of this industry is much more than simple a source of production taxes,” Mr Webb said.
“I also hope government is alert to the danger that, without immediate radical action to improve the tax regime, hundreds of thousands of jobs supported by this industry will be left in jeopardy and the UK’s energy security and balance of trade would also stand to suffer serious damage.”