Conclusions and recommendations
Production to date
1. The
Government is right to focus on security of energy supply as a
key challenge for the UK. Much of the UK's current electricity
generating capacity is set to close over the next decade, and
there is a continuing risk of disruption to energy supplies internationally
as a result of political and economic turbulence. In this context
the importance of domestically produced oil and gas is obvious
and the case for Government doing all it can to help maximise
economic production is compelling. (Paragraph 10)
2. The Government's
priority when determining policy on UK oil and gas should be security
of supply, within the context of moving towards a low-carbon economy.
However, proper account also needs to be taken of the immense
tax revenues paid by the industry and of the 350,000 people whose
employment is reliant upon it. We are concerned to note that the
industry predicts that falling capital expenditure could lead
to the loss of 50,000 of those jobs over the next two years. This
strengthens the case for the Government to investigate further
ways by which it can support UK oil and gas production in the
current difficult economic climate. (Paragraph 14)
Future production levels
3. Estimates
of future levels of UK oil and gas production cover a wide range:
from 11 billion barrels of oil equivalent (boe) to 37 billion
boe according to DECC. The Government cannot influence the amount
of oil and gas remaining in the UK continental shelf. But the
policies it pursues in relation to tax, regulation and licensing
all have an impact on the attractiveness of producing oil and
gas from the UKCS and therefore on production levels. The Minister
told us it would be regrettable if oil and gas production was
at the low end of the estimates, with a consequential need to
import more oil and gas. We think this is an understatement, given
the contribution of the UK oil and gas industry to security of
energy supply, tax revenues and employment. We support the Government's
objective of maximising the economic recovery of UK oil and gas
resources but believe that it now needs to articulate a strategy
setting out how it intends to achieve that objective with realistic
but stretching targets for future production levels. (Paragraph
26)
Investment levels
4. We
are very concerned at the bleak prospects for investment in the
oil and gas industry. If the industry's worst case scenario is
realised in 2010, 50,000 jobs could be lost and production could
fall by millions of barrels. The Government must do what it can
to facilitate investment, and the success of the steps announced
in the recent budget must be judged by whether they help stop
the downward slide in capital investment. (Paragraph 30)
The availability of credit and equity
5. We
welcome the Government's recognition of the difficulties faced
by oil and gas companies in accessing affordable lending and the
fact that DECC, through BERR and HM Treasury, is engaging with
banks to ensure that the UK continental shelf "is at the
forefront of the minds of the banks". However, given the
problems oil and gas companies are having in achieving affordable
borrowing, it does not seem that such engagement is having any
conspicuous success. DECC Ministers should set out, with their
Treasury and BERR counterparts, what steps the Government is taking
specifically to help oil and gas companies access affordable credit
from banks and keep under review the availability of such credit.
(Paragraph 36)
Production costs
6. Smaller
companies in particular are having difficulties accessing the
infrastructure they require in order to produce oil and gas because
in some cases of unrealistic demands by the infrastructure's owners.
The industry's voluntary Code of Practice is not working well
in this respect and, while we are not yet convinced of the case
for a comprehensive statutory "common carrier" system
of access, we do think that Government has to take a more active
part in ensuring the successful outcome of negotiations about
access arrangements. DECC and the industry should make it a priority
to strengthen the voluntary arrangements so that they do not hamper
the ability of companies to operate. If a voluntary code cannot
be made to work more effectively serious consideration should
be given to introducing a common carrier system. (Paragraph 44)
7. The oil and gas
industry operating in the UKCS faces high costs, low prices, lack
of affordable credit and a global recession. The Government cannot
unilaterally solve these problems. But that makes it imperative
that where it can make a difference - in facilitating credit from
banks for example and, even more crucially, in establishing a
fair and sustainable fiscal regime - it does so. (Paragraph
50)
The concept of a Value Allowance and the introduction
of the Field Allowance
8. We
welcome the introduction of the field allowance in so far as it
acknowledges that the tax burden on companies operating in the
UKCS needs to be altered in order to stimulate vital investment.
However, we are very concerned that the allowance seems to be
flawed in a number of fundamental ways. The main problem is that
it does not incentivise incremental investment in existing sites.
Furthermore, we are concerned that: it is likely to be ineffective
in encouraging investment west of Shetland; the criteria for qualifying
for the allowance are so stringent (especially with regard to
HPHT) that its effect will be minimal; and its modest scale is
such that it will not provide a significant incentive for investment
even in new fields. We share the concerns of witnesses that the
allowance will not stimulate the production of the 2 billion extra
barrels of oil hoped for by the Chancellor. (Paragraph 71)
9. The Government
should review the operation of the allowance in its first year
of operation and be prepared to extend its scope and widen the
qualifying criteria in light of that review. In any event, we
think there is a very strong case for widening the allowance so
as to provide a meaningful incentive for investment west of Shetland
and to encourage HPHT opportunities. Furthermore, much of the
UKCS remaining reserves are in fields which are not new but which
will not be further exploited unless the fiscal regime makes incremental
investments more attractive. This is especially the case in PRT-paying
fields where the overall tax rate is 75%. (Paragraph 72)
10. We note the Government's
reasons for pressing ahead with a value or field allowance, rather
than options which appear to have the benefit of being less complex
and of incentivising a wider range of production, such as an across-the
board capital uplift or a reduction in (or the removal of) the
supplementary charge. We recommend that in reviewing the operation
of the field allowance and assessing its effectiveness in increasing
investment the Government be prepared to reconsider the merits
of these bolder moves. It should calculate and set out the predicted
effects on production and tax revenues of a capital uplift or
a reduction in supplementary charge alongside the effects on investment
in the industry. We recognise that the nation should receive
a return in the form of both economic production and tax revenues
from the UKCS. (Paragraph 73)
Other measures in the Budget
11. The
Government was right to listen to the concerns of the industry
regarding specific issues relating to the chargeable gains regime,
the re-use of North Sea infrastructure for non-ring-fenced purposes
and the operation of the Petroleum Revenue Tax. The changes announced
in the Budget regarding these areas are modest but welcome. (Paragraph
76)
12. We note the case
presented to us by industry representatives for accelerating the
payment of accrued but unrelieved tax allowances to smaller companies
and their argument that the lack of equity and debt financing
makes this particularly desirable. We urge the Government to
estimate the costs and potential benefits of this proposal as
a means of tackling the impact of the credit crisis on investment
in the UKCS. (Paragraph 79)
13. We would be surprised
if industry representatives did not call for a more congenial
tax regime. However, it does seem to us that concern that the
Government's fiscal reforms do not go far enough are genuine and
legitimate. The quadruple whammy faced by the industry - of high
costs, low prices, lack of affordable credit and a global recession
- make this a difficult time. We are not convinced that the field
allowance and other measures announced in Budget 2009 - albeit
welcome - are sufficient to create the competitive environment
needed by the industry nor that they will provide a strong enough
incentive to exploit fully remaining resources. We note and welcome
the Government's commitment to further engagement and hope that,
should the measures so far announced prove to be inadequate, more
wide-ranging and generous reforms of the fiscal regime will be
forthcoming. A key part of the UK's energy security strategy and
the prospects of the 350,000 people who work in or with the UK
oil and gas industry depend on it. (Paragraph 82)
West of Shetland
14. We
understand the Government's argument for not wanting to interfere
in a heavy-handed way in the establishment of a common carrier
arrangement for oil and gas west of Shetland. But two things are
clear: west of Shetland resources offer enormous potential - possibly
a fifth of our remaining oil and gas resources; and putting in
place a shared infrastructure to exploit those resources is expensive
and complex. The Government should continue its dialogue with
industry and agree a timescale for the establishment of such a
shared infrastructure and the arrangements governing its use.
If progress does not meet that timescale the Government should
be prepared to take a more active role, probably through regulation
but not precluding assistance with funding. The UK must appreciate
the importance of the resources west of Shetland. (Paragraph
91)
15. We support the
call by industry for all fields west of Shetland to be eligible
for the field allowance. This is appropriate given the difficulties
inherent in exploiting the resources there. In fact, we believe
it would be only of modest assistance and recommend that the Government
consult with the industry on further options for incentivising
production west of Shetland. (Paragraph 94)
Environmental impacts
16. The
oil and gas industry is subject to an array of environmental regulations
and its track record of adhering to them is impressive. There
are concerns, however, about the potential effect of intensive
activity west of Shetland. The Government should instigate and
fund a comprehensive survey of the marine environment and its
wildlife west of Shetland; more generally it should work with
the industry to facilitate a systematic and ongoing plan of surveys
of marine wildlife to fill the gaps left by earlier surveys of
the UKCS area. (Paragraph 104)
17. We note the concern
raised with us that some companies commit to adhere to environmental
best practice but then do not do so once licenses are issued.
In the absence of specific evidence that this has happened we
are not in a position to judge whether this a widespread problem,
or even a sporadic one. We encourage those with concerns about
where this might have happened to raise them with DECC and we
would expect such claims to be investigated fully. (Paragraph
105)
The future for UK oil and gas
18. We
welcome the Government's initiative in the area of carbon capture
and storage, a technology that may offer a major opportunity to
use existing infrastructure and skills in the North Sea with beneficial
outcomes. We look forward to the outcomes of the study into CCS
commissioned jointly with the Norwegian government. We are also
pleased to note that issues raised with us about the licensing
regime for CCS are being addressed and we recommend that DECC
maintains close dialogue with industry to ensure that the regime
works and that the UK can benefit from the potential offered by
North Sea CCS. (Paragraph 113)
19. We note the industry's
argument that the tax treatment of decommissioning securities
is problematic and hampering investment. We look forward to the
outcome of the consultation the Government is undertaking on this
matter and may return to it if it is not resolved satisfactorily.
(Paragraph 117)
20. We would welcome
the Government's assessment of the export potential of the industry
that has developed to support the UKCS and an indication of how
it plans to build on this potential. (Paragraph 118)
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