Memorandum submitted by Amicus
1. Amicus is the UK's second largest
trade union with 1.2 million members across the private and public
sectors. Our members work in a range of industries including,
manufacturing, financial services, print, media, construction
and not for profit sectors, local government, education and the
NHS.
1.1 Amicus welcomes the opportunity to give
its views on the effects of the recent 10% increase in supplementary
tax (2006) on the Oil and Gas Industry and the effects on jobs
and the economy.
1.2 Amicus plays a lead role in the oil and
gas industry and are the largest union operating in the sector.
Amicus enjoys recognition with the Offshore Contractors Association
(OCA), United Kingdom Drilling Contractors Association (UKDCA),
United Kingdom Floating Production Operators Association (UKFPOA)
as well as some Operators and catering companies. The recognition
deals cover over 15,000 of the offshore workforce. Presently it
is estimated that there are over 21,000 offshore workers in the
United Kingdom Continental Shelf (UKCS).
2. Executive Summary
2.1 Amicus is of the firm belief that presently
there is no detrimental impact on the Oil and Gas sector or the
local and national economy as a direct result of the latest 10%
increase in supplementary tax.
2.2 We adopt the position that the latest
increase should be viewed in terms of affordability and given
the present price of oil it is not unreasonable to adopt the view
that the recent increase is affordable.
2.3 We do however have major concerns for
the future of the industry, jobs and of course the positive contribution
made by the oil and gas industry to the local and national economy,
should there be a dramatic and sudden decrease in the price of
oil.
2.4 Amicus proposes that due consideration
be given to the suggestion of a new tax regime for the industry
which is both simple and transparent. A system that will allow
long term stability in terms of activity in the North Sea. A system
that will be diverse enough to react to fluctuations in oil prices.
We believe that by adopting this approach it will assist the industry
in moving forward and away from the current boom and bust situation
that it currently faces.
3. Supplementary Tax Background
3.1 It was in 2001 when the Chancellor introduced
a 10% supplementary tax into the oil and gas sector. This was
met by strong opposition from the oil companies and contractors.
Amicus believes that it should be noted that the role of the contractors
in this industry on various matters, including taxation, is limited
and often curtailed by their relationship and dependency upon
the operators. Given this, it is wholly expected that the contractor's
views on this issue are likely to be aligned with that of the
Operators Association (UKOOA).
3.2 Notwithstanding this with the introduction
of the supplementary tax in 2001, operators and their association
UKOOA threatened to withdraw from PILOT and withdraw co-operation
with the Government because they had not been consulted on the
introduction of this tax.
3.3 Amicus believes that there could and
should have been better communication with the industry prior
to the implementation of the supplementary tax.
3.4 In 2001 Amicus adopted the position not
to support the oil industries lobby to Government following the
introduction of the supplementary tax. The Oil Industry did seek
the support of AEEU, a founder union of Amicus, however the support
was not given due to the actions of major operators in sourcing
construction work from overseas resulting in UK construction yards
losing out.
4. Effect of Introduction of Supplementary
Tax in 2001
4.1 Given the annoyance of the Operators
at the introduction of the supplementary tax, Amicus is of the
firm belief that we witnessed a game of "Political Football"
in the pursuing years.
4.2 We witnessed Operators withdrawing and
withholding investment. This we believe was done to send a strong
message to Government; it certainly wasn't done on basic financial
grounds given that the price of a barrel of oil was on the increase
at that time. In fact statistics will show that there was greater
drilling activity in the early 90's when it was around $19 per
barrel. The operator's refusal to invest in exploration drilling
resulted in over 1,500 jobs being lost in this sector in 2002-04.
Over 20 drilling rigs were anchored/stacked in Invergordon. Drilling
companies were asked to tender for what little work there was,
often at less than break-even rates.
4.3 It should be recognised however that
not all Oil Operators were adopting the same approach. Some smaller
and newer operators, such as Talisman, were keen to acquire acreage
to carry out exploration drilling but were unable to obtain the
acreage to allow them to do so. A situation existed whereby much
of the North Sea acreage was in the portfolios of the four major
operators who refused to work it.
4.4 This prompted Amicus to suggest that
government explore the possibility of an "inactivity tax"
in the hope that exploration drilling could be kick started.
5. PILOT Initiatives
5.1 It was clear that immediate action was
required. There are three major initiatives, which whilst accepted
on a voluntary basis by operators, are none the less the result
of a strong Government approach towards the unacceptable position
of the operators.
5.1.1 Code of practice on access
to infrastructure.
5.1.2 Stewardship of field.
5.1.3 Fallow block—Fallow
discovery introduction.
5.2 Amicus accepts that these initiatives
played a part in the upturn in drilling activity in the UKCS and
are vital to the maximising recovery agenda.
6. Supplementary Tax increase 2006
6.1 It is accepted that the three PILOT initiatives
referred to above are not the only reasons for higher activity
in the UKCS and that the increased value of a barrel of oil has
been the major incentive for the Operators actions. In 2005 the
average price was $56 per barrel, and this year it has yet to
fall below $60 per barrel. Earlier this year it reached a record
high at $75 per barrel. There is a likelihood of the price per
barrel climbing even higher, with some reports suggesting a price
in excess of $90, dependent on developments in Iran, demand in
the Far East and the behaviour of Russia in its control of supply
to Europe.
6.2 Oil companies have in the last two years
posted record profits and it is expected that 2006 will be the
best year to date. This is of course good news as it allows the
companies to address their investment portfolios for the UKCS.
Whilst no company will openly divulge the exact details of how
their investments are evaluated, due to commercial sensitivity,
it is known that the window for evaluation is based on the price
of oil being in the region of $20-$25 per barrel, while some have
indicated that they look at $28. It is therefore clear that the
industry is currently enjoying a "boom".
6.3 It is against this background that the
Treasury announced the further increase of 10% in the supplementary
tax earlier this year. Whilst Amicus did not lobby Government
for an increase in tax, it is, in our opinion, affordable at this
time. It is for this reason that Amicus once again refused to
support the industry lobby to have this tax overturned.
6.4 Amicus believes that the public pronouncements
from the industry association UKOOA which followed this announcement
was an over reaction designed to put pressure on government. Its
suggestions that this tax increase would stimulate an exodus from
the North Sea and deter investment in new fields have proved to
be false. Although it was reported at the time that Shell, one
of the largest oil operators in the North Sea, was cutting its
exploration drilling portfolio as a direct result of the tax increase,
prompting Amicus to write to the Energy Minister calling for an
immediate investigation, it later transpired that Shell have not
and did not intend to cut back its drilling activity. It would
appear that at the time the Shell story suited the UKOOA position.
6.5 It is therefore important to examine
the reality of the effects of the increase. In terms of activity
in the North Sea, we are seeing the highest activity for a number
of years. There appears to be absolutely no adverse effect in
terms of drilling activity. In fact the forecast for rig utilisation
is very good for 2007-08. It is accepted that beyond this it is
dependent to a large extent on the price of oil.
6.6 In terms of jobs, not just in Scotland
but the whole of the UK, some six months after the implementation
of the tax increase, Amicus is not aware of any company, operator
or contractor, that is not in a constant recruitment mode. It
is widely acknowledged that the industry faces a massive skills
and people shortage. This has resulted in a number of initiatives
being taken forward by individual companies and the industry as
a whole. Amicus, along with other trade unions are presently engaged
in positive dialogue with companies to examine the possibility
of using non UK labour. One company alone has advised that for
the shutdown period this year they will be looking for over 1,000
suitably qualified staff.
6.7 It follows that, given points 1 and 2
above, the local and national economy is healthy in relation to
the contribution from the Oil and Gas sector at this time.
6.8 It has also recently been reported by
the DTI that the interest shown for the next licensing round in
the UK is at is highest level in 35 years.
6.9 On Wednesday 28 June 2006 Venture Production
announced a five year term drilling investment in the North Sea
worth £200 million.
6.10 Amicus have been consistent in its opinion
in relation to the effect of the 10% increase in taxation, whilst
others have required more time to consider their position. However
by way of evidence to support our submission we draw the Committee's
attention to a recent report commissioned by UKOOA which stated:
"As many as 15,000 jobs will be created in the UK offshore
oil and gas industry this year on the back of a £1 billion
surge in investment by companies". This clearly suggests
that the predicted negative impact resulting from the 10% tax
increase this year has failed to materialise.
7. The Future
7.1 Amicus fully supports a positive and
vibrant approach to the Oil and Gas industry which we believe
has a vital role to play in the future energy supply for the UK.
Amicus has set out in detail its position on future energy supply
and demand in its submission to the Government's consultation
on the Energy Review.
7.2 We believe that it is vital that to continue
to promote exploration drilling for the long term future of the
Oil and Gas Industry. Amicus acknowledges that discoveries are
smaller than in previous years and therefore financially less
attractive to operators. Furthermore, the areas yet to be drilled
pose more problems in terms of accessibility. It is for these
reasons that Amicus strongly believes that Government needs, as
a matter of urgency, to examine financial incentives for companies
to take on board the initial risks.
7.3 Amicus recognises that the long term
future of the industry is dependent on investment. Therefore,
whilst accepting the need for Government to apply appropriate
taxation, Amicus advocates that the time is right to have a simpler
and more transparent tax regime. Amicus supports the rational
that when times are good and company profits are at record levels
then taxation should be at its highest.
7.4 We do however have a concern that the
industry could be in very serious difficulty if the price of oil
should dramatically drop and the tax take remain unchanged. This
would have an obvious negative and serious effect on the economy
and we would once again see many members face losing their jobs.
7.5 With this in mind Amicus suggests that
a Treasury working group examine the possibility of introducing
in the future a simpler, transparent tax regime that would take
account of the fluctuations in oil prices. Amicus would welcome
the opportunity to participate fully in any group formed for this
purpose.
Alan Harvey
National Officer
Amicus Process Sector
30 June 2006
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