Examination of Witnesses (Questions 100-119)
MR DAVE
BLACKWOOD AND
DR REBECCA
BROWN
18 JULY 2006
Q100 Mr Devine: Apache has been in
the North Sea for three years.
Dr Brown: Yes.
Q101 Mr Devine: How much profit have
you made each year in those three years and how much profit has
BP made from the North Sea in the last three years?
Dr Brown: I do not have those
figures with me today but I could certainly provide them.[1]
Mr Blackwood: I can get them for
you as well.[2]
Q102 Mr Walker: In your opening statement
you mentioned the impact that taxation may have on future exploration;
do you think the Chancellor's tax of £2 billion, although
it may fill a short term gap, will discourage future exploration
of perhaps marginal sites and fields?
Mr Blackwood: That is the question
of the day. Hopefully as Government and the industry share a common
view of maximising recovery from the North Sea, the question is
has this fiscal change helped or hindered achieving that objective?
Our premise is that certainly if we see a world in which many,
our company included, believe we will see these prices soften
again—if we arrive at a situation of having softer prices
and this fiscal regime—we will damage that ultimate objective
of maximising recovery. That is why as a corporation we have been
pretty consistent that what we really believe and we would like
some assurance on is that in the event of oil prices coming back
down, we would like to see this tax revisited.
Q103 Mr McGovern: Can I just clarify
that, and I would appreciate it if Mr Blackwood and Dr Brown could
answer. As the price of oil stands at the moment you do not have
a problem with the tax level, it is only if the price per barrel
falls that you regard it as a problem.
Mr Blackwood: I would not use
those words.
Q104 Mr McGovern: That is the impression
I am getting.
Mr Blackwood: If I gave you that
impression I gave you the wrong one. In absolute terms this tax
already has the potential to damage that future recovery and in
three or four years time we will find out what the scale of that
may or may not be, but as an absolute backstop we, the North Sea,
are actually heading for a bad place if indeed the price softens
and this fiscal regime is still in the same place.
Q105 Chairman: We would like to know
whether tangible damage has been done to the industry by the tax
increases recently announced by the Chancellor, and if the more
marginal fields have become uneconomic. What effect do you think
the tax increases will have on the oil industry and on the Scottish
economy?
Dr Brown: I think the tax increase
will impact marginal fields and there are projects at the moment
where that could be the difference between it maybe going ahead
or not. Obviously, if these projects do not go ahead that will
be less money into the Scottish economy so it will impact it.
Q106 Chairman: Mr Blackwood, do you
want to say anything on this?
Mr Blackwood: I believe, Chairman,
we tend to think of this as big, discrete projects. The days of
multi-billion pound developments of several hundred million barrels
in the North Sea are unlikely to be seen again, so today we are
talking more of a continuum of smaller projects, much smaller
projects—orders of magnitude smaller which may involve three
or four wells, which themselves will cost tens of millions of
pounds. It then becomes very much more of a continuum where those
at the margin, not the average projects but the expensive ones—and
the expensive ones today are west of the Shetlands with small
accumulations of single figure millions, five million barrels—could
be facing development costs north of $20 per barrel. By the time
you factor in that, the cost of operating it, the cost of finding
it, it becomes a pretty expensive business. It is those marginal
ones, therefore, which over the next three or four years are the
ones that are going to suffer.
Q107 Mr Walker: Why would you bother
with those anyway? You are a global, international company, you
are not going to waste your time anyway with five million barrel
reserves; why would you do that as a business, even if it was
marginally economically viable? Why would you waste your manpower
and resource on chasing small deposits like that when you have
got the rest of the world to focus your attention on?
Mr Blackwood: You would do that
and you would only do that because they are additions to infrastructure
which already exists. You would not go chasing small projects
like that in splendid isolation.
Q108 Danny Alexander: Before we move
on I just want to follow up a point that Dr Brown made; I wonder
if you could give us any specific examples of developments you
are engaged in or maybe will be looking to do in the future which
might be affected in the way that you describe?
Dr Brown: I cannot really say
that due to commerciality, but we do have a particular project
that we are looking at and I would say fiscal is one of the key
areas that could make or break the project.
Q109 Mr Davidson: One of the difficulties
I am having in getting to grips with this is that there is nothing
that anybody seems to be able to put their finger on as an adverse
effect of the tax increase, and I remember when we were discussing
the introduction of the national minimum wage—which would
not apply to yourselves—we were told that civilisation would
come to an end if we introduced a national minimum wage and there
was literally no adverse consequence at all. How can you demonstrate
to us that this is not just simply scaremongering, that there
is some connection that there is going to be between the tax increase
and adverse consequences? I presume that neither of you particularly
like paying tax; I am not particularly fond of it myself either,
but it has got to be done and we are trying to minimise the damage.
So far as we have not heard anything, I think, that convinces
us that there have been adverse consequences flowing directly
from this rise.
Mr Blackwood: Let me try to be
honest and realistic in two cases as it were. As I say, we are
not talking of a world today of some big, discrete, chunky projects,
so how it will play out in the future is—decisions such
as how far ahead do we commit ourselves? How far ahead do we actually
book rigs to drill wells for us at these prices today, with this
fiscal regime and an ever-decreasing parcel size of oil that we
are going to find? The physics are all going against us, it is
getting more difficult and more costly and it will stop us making
commitments further ahead in time unless we have some sort of
comfort that this is going to be a cost base and a fiscal base
that is actually going to react to the oil price. It would be
a foolish company that actually today walks in with this cost
base for five or 10 years into the future. People will be hesitant
to do that. The other way in which it shows up—and this
is more at an industrial level in the basin, as it were—in
absolute terms, like it or lump it, in gross maths, we have made
UKCS in relative terms less attractive than it was—that
is a simple statement of fact. What that is giving rise to is
resources—both human and very skilled resources and the
capital resources in the form of diving support vessels and rigs
et cetera—which are starting to slowly leave the basin for
other places where they can get longer term certainty. If we lose
that resource we actually will not be able to execute the work
programmes we would like to. That is a real risk: you have changed
that relative attractiveness in an industry where it is currently
globally tight, if you change any one place the resources move.
Q110 Mr Davidson: Pretty much the
same sort of thing was said at the time when they introduced the
Plimsoll Line and stopped small boys climbing chimneys, but there
is nothing that I can grasp here that is flowing directly as an
adverse consequence in the way that some of my colleagues were
suggesting. Doctor, is that a reasonable assumption?
Dr Brown: I would just make the
comment that it is too early to see that impact but I do agree
with Mr Blackwood's comment that there is this long lead time
and people will not be locking into long term contracts at this
type of price for a development five years down the road.
Q111 Mr Walker: You will invest your
shareholders' money where you can get the best return and potentially
this tax may just price you out of some Scottish oilfields and
you will put that investment into oilfields somewhere in Kazakhstan,
for example?
Mr Blackwood: I compete for BP's
global capital on a variety of parameters including the economic
attractiveness, the political stability et cetera where the resources
are and the ability for us to deploy technology to develop them.
That competition for capital is how it will work.
Q112 Mr Walker: The North Sea has
no automatic right to expect BP capital and future investment
if the environment is uncompetitive in that marketplace.
Mr Blackwood: Yes, and just going
back to the previous question, we have altered that balance.
Q113 Mr McGovern: The Scottish Affairs
Select Committee recently travelled to Aberdeen to take evidence
from UKOOA and ironically, I think coincidentally, on the day
the local Aberdeen press carried a story of record application
for licences to explore, they were at an all-time high, which
seems to me to be totally at odds with your contention that this
change to the tax regime has had a detrimental effect on new exploration.
Mr Blackwood: We need to look
through the entire process of applying for a licence, working
up the drillable prospects, drilling wells and turning them into
development. What we are seeing today with a lot of the good work
that has gone on between the industry and the DTI—the inside
the PILOT forum, of which we are a part—we have put processes
in place which have really engendered activity in this front end,
and there has indeed been a high level of interest in new licence
rounds. The big question is whether that is translating forward
into wells being drilled by way of exploration wells into development
and then turning them into production. The data on that one is
not quite so optimistic. The data thus far from 2005 to 2006 shows
we are seeing an increase in development wells, which are typically
drilling oil next to adjacent oil infrastructure that has already
been found, but we are actually still seeing a decrease in exploration.
Whilst there is a lot of activity at the front end, that is not
yet manifesting itself and actually turning into new exploration
wells being drilled.
Q114 Mr McGovern: Can I just ask
Dr Brown do you concur with that assessment?
Dr Brown: When you apply for an
exploration licence—I think exactly as Mr Blackwood said—it
is around the exploration, you are not committing yourselves to
a development, it is around that first stage in the process.
Q115 Ms Clark: You have obviously
heard from one of my colleagues one indication as to whether there
has been an impact from this particular tax base; we also know
that historically huge profits have been made by the oil companies
out of the oilfields in the North Sea. Do you accept that you
have not really been able to bring any tangible evidence to this
Committee that there has been any detrimental effect so far from
the taxes that have been levied?
Mr Blackwood: I would put to you
that we have been very honest that during 2006 and 2007 you are
very unlikely to see much of an impact; I do believe we will start
to see the beginning of an impact after that period and if prices
soften we will see a very significant impact.
Q116 Ms Clark: With the current levels
of pricing do you think it is quite reasonable that the British
taxpayer also should share in the profits that are being made
by the oil industry?
Mr Blackwood: Absolutely; the
British taxpayer is sharing in those profits via the tax regime
as it exists: as we make more profits through increased prices
we pay more taxes.
Q117 Mr Devine: You made an interesting
comment that when you bid for BP's development money there are
certain criteria, one of which is political stability. Can I take
from that that if Scotland went independent, creating instability,
that would have big implications for you as a company?
Mr Blackwood: I would leave it
to others to judge whether that would create a higher or a lower
level of stability. We work with scores of governments around
the globe and I am sure we could manage to work with a Scottish
government as well if one existed.
Q118 Ms Clark: On the issue of political
stability, particularly in the oil markets, political stability
must be one of the major factors that you take into consideration.
Surely Britain must be one of the more politically stable areas
where oil companies can invest and for that reason must be a very
attractive option for oil companies.
Mr Blackwood: Yes, it is a cocktail
of all those parameters. Unquestionably it is one of the more
politically stable, and the obvious comparator is the other side
of the Atlantic which many would regard as being in the same arena
in terms of political stability—albeit a tax regime where
the average tax is around the 45% mark as opposed to our taxes
here which vary between 50 and 75%. We also need to factor into
that cocktail fiscal stability; we have not yet mentioned a lot
of the big decisions. We have just developed the first phase of
the Clare Oilfield and we are looking very hard at trying to develop
the second phase of it; this could be a billion pound decision
eventually when we have finished the appraisal work and it has
a payback period that looks over a couple of decades, it is a
20 year decision. When you look at that over that period of time,
one of the things you are looking for is stability when you make
that investment and we are as the UKCS not anywhere near the top
of the league these days in terms of stability with the number
of changes we have had in the last three or four years. Very few
countries have changed more than UKCS has in the last three or
four years.
Q119 Danny Alexander: Given what
you have said about the importance of fiscal stability, I ask
you the same question I asked UKOOA when we saw them, which is
could you think of any fiscal regime in the world that is less
stable than the UK's from your experience of the last two years;
following on from that, in the energy review that the Government
published last week they made clear that the Treasury's review
of the fiscal framework will be "vital" to the UK's
oil and gas resources. In your discussions with the Treasury will
you be seeking an opportunity to try and get a decision on this
tax increase reversed?
Dr Brown: We are taking part in
the consultation with the Treasury and we have presented what
we see would help a company like ourselves around the marginal
projects, but we have not asked for a reversal—we have not
been prescriptive as to what form that might take.
1 Pre and post tax profit data for Apache North Sea Limited for 2003 and 2004. 2005 data is not yet finalised.
|
2004 |
2003 |
| Profit/(loss) before tax |
$9,030,000 |
($11,852,000) |
| Profit/(loss) before tax |
$1,721,000 |
($11,111,000)
|
Back
2
BP's profit in the last three years
| ($ million mod) |
2003 |
2004 |
2005 |
| UK upstream post tax profit |
1,951 |
2,106 |
1,672 |
Back
| 
