Memorandum submitted by Scottish Enterprise
1 INTRODUCTION
Scottish Enterprise welcomes the opportunity
to submit evidence to the Scottish Affairs Committee's inquiry
into Effects of Tax Increases on the Oil Industry.
As Scotland's main economic development agency,
this response focuses firmly on the potential impacts to Scotland's
economy as a result of the recent tax increases.
Growing Scotland's economy is the Scottish Executive's
top priority. The Framework for Economic Development sets out
the Executive's overarching economic development strategy and
the recently refreshed "Smart, Successful Scotland"
(SSS) sets out an enterprise strategy for Scotland.
Scottish Enterprise's (SE's) mission is to help
the people and businesses of Scotland succeed. In doing so, we
aim to build a world-class economy.
2. POTENTIAL
IMPACTS OF
RECENT TAX
INCREASES TO
SCOTLAND'S
ECONOMY
In partnership with major operating and service
companies in the oil and gas industry, the Scottish Enterprise
Energy Team has for many years supported the economics research
undertaken by Professor Alexander G Kemp and Linda Stephen at
the University of Aberdeen.
We believe that their approach to modelling
of the industry, coupled with their highly developed and up to
date database of production facilities and reserves, make them
the most reliable source of forecasting for the oil and gas industry.
We have therefore adopted their latest North Sea Study Occasional
Paper No 101 entitled "Prospects for Activity Levels in the
UKCS to 2035 after the 2006 Budget" issued April 2006 as
the basis of our consideration and response to the Scottish Affairs
Committee Consultation.
Professor Kemp's paper considers three oil and
gas price scenarios for the basis for its projections:
High—oil at $40 per barrel of oil equivalent
($/bbl)/gas at 36 pence per therm
Medium—oil at $30 per barrel of oil equivalent/gas
at 28 pence per therm
Low—oil at $25 per barrel of oil equivalent/gas
at 24 pence per therm
A striking conclusion of the paper is the relatively
small size of the remaining undeveloped fields and incremental
development opportunities in the UK Continental Shelf, accompanied
by high unit lifetime costs. From this it would appear that any
increase in taxation will directly influence future investment
decisions in this province.
The paper measures the effects of the 2006 Budget
tax increase in terms of its consequence on field investment,
field operating costs, and production in the long term to 2035.
Using the range of cases outlined above, cumulative field investments
are forecast to be reduced by between £900 million and
£2 billion, with operating expenditures reducing
by between £950 million and £1.75 billion.
The oil and gas industry works on long development
timescales, and this reduced investment is therefore not expected
to occur until after 2010-12. The rate of reduced investment then
increases with time.
These reductions in projected investment are
cumulative over the period 2006 to 2035, and they may not appear
excessive when related to current levels of investment in the
UKCS. However it is clear that anything that may deter sustained
investment and commitment from oil and gas operating companies
is a serious threat to the supply and service chain which contributes
so significantly to the economies of Scotland and the UK.
Scotland's oil and gas businesses have developed
world class technologies and service provision which make them
highly respected in global energy markets. SE research estimates
that, on average, Scottish oil and gas specialists now deliver
over a third of their annual turnover in international markets.
This very encouraging and increasing level of
global growth is being achieved by the innovation and technology
development of Scottish businesses—and these credentials
are directly attributable to their experience in the North Sea.
From an economic development perspective, it
is therefore essential that the domestic North Sea market is maintained
for as long as possible. It is here that our supply and service
specialists develop and sustain their competitive advantage.
It seems inevitable that this second increase
in supplementary Corporation Tax will contribute to shortening
the lifespan of our domestic industry, and will result in reducing
levels of capital and operating investment in the years to come.
In turn, this will reduce the opportunities for growth for Scottish
oil and gas businesses, will deter research and development in
Scotland, will reduce innovation in service provision, will reduce
industry confidence, and through time must diminish the credibility
of our supply chain—a major source of gross value add.
29 June 2006
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