Examination of Witnesses (Questions 91-99)
MR DAVE
BLACKWOOD AND
DR REBECCA
BROWN
18 JULY 2006
Q91 Chairman: Good afternoon and welcome,
Mr Blackwood and Dr Brown, to today's evidence session on the
Scottish Affairs Committee inquiry into the effects of tax increases
on the oil industry. Before we start on the detailed questions,
would you like to make any opening remarks?
Mr Blackwood: Yes, Chairman, thank
you for this opportunity; I would like to summarise very quickly
BP's attitude to what is in fact the third UKCS tax increase in
as many years. Observers of the North Sea might easily assume
it is a straightforward exercise to assess the effects of any
movement in tax and give precise measurements of how that behaviour
is thereby affected, but it is not quite as simple as that in
that past decisions cannot be turned on or off instantly and it
is too soon to assess the full implications of the last budget.
What I can say with certainty as the head of BP's activities in
the North Sea is that any tax increase in the North Sea makes
my task of attracting capital and manpower into the UKCS more
difficult, and the reason for this is because of some unavoidable
facts and realities about the North Sea itself, and I would just
like to highlight some of these. The first is in the area of exploration:
the North Sea has become a very difficult place to find significant
quantities of oil and gas. The average size of fields is getting
smaller and at a commercial exploration success rate of the last
few years of somewhere between 10 and 20% at best, the North Sea
is hardly an optimistic location for new discoveries. Secondly,
production, which has fallen from a peak of 4.6 million barrels
of oil equivalent per day—oil and gas—in 1999 to 3.3
million in 2005, a fall of nearly 30%, despite the industry investing
over £40 billion in the UKCS over the last five years, so
inescapably the North Sea is subject to the laws of physics. The
third is cost: current cost inflation is running at somewhere
between 15 and 20% per annum because of the global competition
for supply chain resources, both human and technical. That actually
means we have to spend more just to stand still. The unfortunate
truth, therefore, is that on almost every possible measure the
UKCS is becoming a much more difficult place in which to operate.
Common sense would dictate that this is possibly one of the last
provinces of the world to have warranted a tax increase, and possibly
the only redeeming factor is the current high oil price which,
although disturbing for many other reasons and irrelevant in terms
of UKCS competitiveness, it does help to disguise some of the
things I have been talking about. One last point: all of these
factors are challenging, they are not insurmountable, and UKCS
could still have an exciting future. According to the latest data
there is still up to 26 billion barrels of oil equivalent to be
found and developed in the UK. BP plans to spend in excess of
£1 billion per annum within the UKCS over the medium term.
The question is whether it is sensible to have compounded the
difficulties I have expressed with an additional fiscal burden.
Most of our challenges are dictated by nature; all government
can do is to help provide an appropriate fiscal and regulatory
regime, appropriate that is for maturity of the province, rather
than the short term economic pressures of the day. That is why
we believe that the recent tax increases have been ill-judged
and in defiance of the realities. It has dealt a blow to investors'
confidence in the North Sea and it is a bad advertisement to other
governments across the world. If the oil price were to weaken
significantly, it could have even worse consequences, which is
why we as a corporation have argued that if taxes are introduced
when prices are high, they should be removed if and when they
fall and investors should be given certainty that this will be
the case. BP remains committed to the UKCS, we are not afraid
of the challenges we face, it is our job to overcome them, but
the tax increase can hardly be described as sensible or helpful.
Q92 Chairman: Dr Brown, do you want
to say anything?
Dr Brown: First of all I would
like to say that Apache welcome this opportunity to be here today,
and I trust that by the end of this session you will have gained
a better understanding of what a company such as ourselves brings
to the UK and how the fiscal environment can impact what we do.
There are a couple of remarks that I would like to make that are
intended to act as some sort of further context to your possible
questions. Apache has been in the North Sea for just over three
years, making their entrance with the purchase of the Forties
Field. During the time we have been here, we have invested $1.1
billion in wells and facilities in the region and taken Forties
production from around 40 MBD to over 70 MBD. We have also required
a further 36 blocks through the 22nd and 23rd licensing round
and have bid for more in the ongoing 24th round. To date we have
drilled over 30 Forties production wells and over 10 exploration
and appraisal wells outside of the Forties area. We have a rig
contracted for a further exploration appraisal programme due to
start later this year. I could go on, but I am sure that you have
got the message that we are a high activity company and the North
Sea is a key piece of business for us, Our intent when we came
to the North Sea was to make this a key region for us and to grow
our business here. We can grow our business through acquisition
of existing fields and/or development of new fields, or in some
cases redevelopment of old fields; in many cases the development
of a new field or the redevelopment of an old field would be a
marginal project, and the current environment of high costs and
the latest tax increase will have an impact on these projects.
In our opinion the UK Government needs to encourage investment
in such projects as part of the objective to maximise recoverable
hydrocarbon reserves.
Q93 Chairman: Can you please tell
the members of the Committee very briefly the extent of your respective
companies' operations in the North Sea?
Mr Blackwood: The extent of the
operations. We have been in the North Sea as BP for somewhere
in the order of 40 years, starting in the southern basin, 30 years
in the oil provinces further north and we are today still producing
around half a million barrels of oil equivalent a day. We are
the largest investor and the largest net producer of oil and gas
in the UKCS.
Dr Brown: As I said in my opening
comments, we have been here for three years. The Forties at the
moment is the only field we operate, producing around 70 MBD and
we are undertaking exploration programmes as well.
Q94 Mr Davidson: I wonder if I could
just follow up the points that Mr Blackwood made. You said it
was too soon to tell whether or not there had been any adverse
consequences as a result of the tax increase. Over how long a
period must we wait before it is clear?
Mr Blackwood: If I can tell you
a bit more as to what was behind that; the nature of the activity
in the industry just now is pretty tight for resources globally,
which leads everyone to try to plan further ahead to get their
activity sets clearly laid out and contracts in place for both
the human and the hardware components of the business available
to them, to get rigs, to get vessels et cetera. Most companies
have 2006 and 2007 pretty tightly laid out in front of them, and
in truth that activity will continue pretty much as it was planned.
The issue then becomes as we look further into the future; the
marginal projects, as they are examined with a slightly higher
tax regime, are the guys which are going to suffer and people
will not make those longer term decisions. The other piece we
need to bear in mind that has a time component to it is pretty
much the inflationary element I referred to; the cost base of
the industry pretty much tracks the oil price with a lag of something
like 18 to 24 months, so we are actually still in the course of
2006 and possibly into 2007 yet to see that cost base come up
completely to match where today's prices are. People will then
be evaluating stuff with higher oil prices, admittedly—but
with a higher cost base than the last couple of years and a higher
tax regime, so to me it is going to be three or four years before
we actually see decisions being made differently.
Q95 Mr Davidson: Can I follow up
that point about the cost base? You did indicate that cost inflation
was 50%.
Mr Blackwood: No, 15 to 20%. If
I could amplify that, it is a span from some areas which are next
to nothing because there are long term contracts in place, through
to the most acute example which is drilling rigs; where the day
rate for drilling rigs has increased by anything from a factor
of three to a factor of six—not percentages, multiples.
Q96 Mr Davidson: A factor of 300
to 600% of an increase is certainly a great deal less than the
increase in tax and in many ways it could be argued that the fact
that the tax has increased as a percentage much less than the
increase in your costs, so maybe we ought to make sure that these
things rise in parallel.
Mr Blackwood: I make this point
only: the presumption in many quarters is that as the oil price
has increased, all of this rent is actually available to the operators
but I would say quite a lot of it is dissipated down through the
entire chain of the industry.
Q97 Mr Walker: If oil remains, say,
above $50 for a considerable amount of time, will that not mean
that previously uneconomic reserves come into play and it is more
viable to abstract them from the ground?
Mr Blackwood: If investor confidence
arrives in a place where there is a belief that those sorts of
levels of prices will sustain, yes, I would agree with you, sir.
Q98 Mr Walker: That means wells that
were previously deemed to be exhausted although perhaps 50 or
60% of the reserves were left could be revisited.
Mr Blackwood: Potentially.
Q99 Danny Alexander: You mentioned
in response to Ian's question that plans for 2006-07 are pretty
much set in stone and that they will go forward whatever happens
and it is the future decisions going on that could be affected
by the tax change. Is it simply the tax change in itself that
affects those decisions or is there also a factoring in of perceptions
about future tax changes that may or may not happen that influences
those decisions too?
Mr Blackwood: I think it is more
the reality of the change we have, but we will always look at
sensitivities. In the economic evaluation of a long term capital
investment you look at the sensitivities on every parameter—the
costs, the reserves—and you look at the sensitivities on
the fiscal regime as well. Fundamentally it is factoring in the
change we have already seen.
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