Select Committee on Scottish Affairs Written Evidence


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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