In a letter to both the UK Chancellor of the Exchequer and Scottish First Minister, independent business organization N-56 has put forward a five-point plan to secure the short-term and longer-term future of the North Sea oil and gas sector, urging both UK and Scottish government collaboration on implementing the organization's recommendations.
The five-point plan forms the centerpiece of the organization’s latest report, Oil & Gas: A Long-Term Plan to Maximise Economic Impact. The report is being launched on the day that the Scottish government is holding a debate in the Scottish Parliament on “Action Needed to Support the Oil and Gas Sector” and in the run-up to the UK Government Budget on March 18.
At the heart of this report is a call for government policy and decision makers responsible for oil and gas taxation and regulation to be relocated from London to Aberdeen, Scotland, moving them closer to the industry itself and echoing the situation in Norway.
This would include UK government functions such as HM Treasury oil and gas taxation and Department of Energy and Climate Change functions and the Scottish government’s Energy Directorate. This will ensure that they are closer to those whose jobs and businesses depend on the continued success of the sector, making it more responsive.
Such a move would echo the decision to locate the new Oil and Gas Authority, the independent regulator, in Aberdeen, and would deliver a vital boost to the sector, ensuring that it can realize its full potential. It would also echo the situation in Norway, where policy makers in the petroleum directorate (Om Oljedirektoratet) are co-located with the industry in the Norwegian oil capital, Stavanger.
In addition to relocating key decision makers from London to Aberdeen, the N-56 five-point plan recommends the following:
A tax regime to maximize economic impact: The tax regime for the oil and gas sector should be designed to maximize economic impact rather than short-term tax revenue for the Treasury. This may mean sacrificing tax revenue in the short term but will mean that the tax revenues will be much greater in the longer-term. Following the Norwegian example, the tax regime needs to recognize that the UK Continental Shelf is a mature basin and incentivize exploration, investment, and research and development.
Hydrocarbon Investment Bank: Recognizing the changing structure of the sector and the increasing role of small developers, a Hydrocarbon Investment Bank should be established (along similar principles to the Green Investment Bank) to boost investment in the sector. This would be tasked with both a domestic and an international remit and would be able to support exploration companies, operators, and the wider supply chain.
Norwegian-style long-term strategy: To fully exploit the oil and gas reserves left in the North Sea. This plan would far exceed the scope, scale, and ambition of the myriad of existing strategies and business plans. It echoes the strategic approach taken in Norway, where policy has been developed by government, the industry, public sectors, and others working collaboratively to identify the measures required to maximise the sector’s long-term economic contribution, giving much greater support to the industry than from government. As part of the strategy, a small percentage of taxation receipts (perhaps 5%) should be ring-fenced and used to fund R&D, skills development, international business expansion support, and other activities designed to foster economic growth.
Incentivize offshore unconventional opportunity: Incentivize R&D activity and feasibility studies of Kimmeridge Clay unconventional production – offshore “fracking.” While this opportunity is currently at a very early stage of development, if it is proven to be feasible, it could extend UK oil and gas production for another century, and so N-56 believes that it should receive policy attention now.
The report was prepared for N-56 by BiGGAR Economics, drawing on research from energy consultancy, Tulloch Energy, and from policy and economics consultancies, DAMVAD (Norway, Sweden, and Denmark).
The reduction in the oil price has had an effect on the economic contribution of the North Sea oil and gas sector and there could be significant impacts if the lower price continues in the long term. However, the long-term price of oil to 2040, as predicted by OPEC is expected to be $100 per barrel to reflect the global rise in costs of production.
Dan Macdonald, founder of N-56, commented, “The oil and gas sector has the potential to remain a centrifugal force for decades to come, as the oil price returns to a normal global level as is predicted. Meanwhile, it is critical that exploratory development and the future potential of our North Sea resources continues unabated and that we are prepared for short-term slumps, as well as the long-term highs that have seen the massive positive flow of tax revenue from which the UK has benefitted.
“The five-point action plan, outlined in our letter to the Chancellor of the Exchequer and First Minister, will ensure that the remaining potential of Scotland’s offshore oil and gas reserves is maximized, with strategic refinement. The urgent necessity of both administrations working together on delivering this can't be understated.
“Ninety percent of oil and gas reserves lie in Scottish waters. It is vital that those policy and decision makers responsible for taxation and regulation of the sector are located in Aberdeen, where development of the industry is properly understood. We can then ensure the delivery of a sector that is responsive to those most impacted by it.
“Hugely increased collaborative effort between all major stakeholders, the government, operators, and public sector, in the delivery of a long-term oil and gas strategy is vital to ensure that the economic potential of Scotland’s remaining reserves is maximized. And it is critical that this is done immediately.”