Supplementary memorandum submitted by
the Oil and Gas Independents Association (OGIA)
We would like to thank you for the opportunity
to present oral evidence to the Energy and Climate Change Committee
on the 11 March 2009.
In addition to the oral evidence we would be
like reiterate four key points.
FISCAL CHANGE
We need to recognise that the era of easy to
produce hydrocarbons is drawing to a close in the UKCS. The fiscal
terms should reflect this and be designed to encourage the development
of the more challenging resources. Through the consultation process
between HM Treasury and the Oil and Gas Industry we have identified
changes that can achieve this. Through the proposed targeted Value
Allowance (details attached) there is a way to encourage the development
of Small Fields, Heavy Oil and High Pressure High Temperature
Fields. This proposal encourages developments in a low commodity
price environment and gives HMT access to a greater fiscal share
if the commodity price increases without any further legislation
change.
SECURITY OF
SUPPLY AND
JOBS
There is a substantial quantity of discovered
heavy oil (0.7-0.9 billion barrels recoverable) and HPHT (1.5
billion BOE recoverable) in the UKCS. The development of Heavy
Oil could contribute over 200,000 bopd of incremental production
together with a further 150,000 boepd from HPHT by 2015. This
equates to 25% of the UK oil production today. Assuming $50/BOE
this would improve the UK annual balance of payments by $6.4 billion
and reduce our dependence on imported energy, as well as generating
material tax revenue and jobs.
ACCESS TO
INFRASTRUCTURE
Extract from transcript 11 March 2009:
Q5 Sir Robert Smith: "I must first
declare my interest: as a shareholder in Shell, which is in the
Register of Members' Interests; and Vice Chair of the All-Party
Group for the Offshore Oil and Gas Industry. In that role, we
went on an offshore northern seas visit, and accommodation was
sponsored by various oil companies. On access to infrastructure,
is there a crucial message that if we are going to see the rosy
picture, then whatever happens that infrastructure has to be seen
to be worth maintaining so that it is still there; because you
could not from scratch—the finds you are now finding would
not be much use without that infrastructure?
It is vitally important that infrastructure is
there. Increasingly, we are finding smaller accumulations in the
North Sea, and they cannot support their own dedicated infrastructure,
so we have to be able to tie them back to existing infrastructure,
which has to be there. Ultimately, it drives exploration. If you
are expecting to find relatively modest pools, you have to know
there is an efficient way of getting it to the shore. It is vitally
important that it stays there. I guess you have touched upon the
issue of the infrastructure code of practice, which came out in
2003 or 2004. As we put in our submission, we are not convinced
that is working effectively. We would like to see changes in that
regard.
Q6 Sir Robert Smith: More intervention
by the Government?
Mr Booth: The Government does have
the ability to intervene on tariff arrangements; however, it needs
to be invited to do so, and certainly the infrastructure code,
which was introduced a few years ago, requires all companies to
issue an invitation to the Government to participate. I can tell
you from first-hand experience that that is perhaps not happening
as often as it should do, or at the time it should do.
Q7 Sir Robert Smith: So what should change?
Mr Booth: It is difficult. It is
still a voluntary arrangement, and until the industry decides
it wants to apply those voluntary arrangements, it is really not
going to happen. I have always had a bee in my bonnet about this
issue, and it is still there. My own company is in the middle
of trying to get access to infrastructure, and without naming
names—
Mr Booth: We only have one development
under consideration, so it is very easy to find out! The issue
is that the companies concerned did not want to issue the automatic
referral notice, which is the invitation to Government, because
our operator told us, "we didn't want to upset the other
side and we want to agree the terms before we put it in".
That is not really why it was put in place, but that is the nature
of—a direct example of what is happening right now.
Q9 Chairman: If there were going to be
some changes to this code, what would be your priority?
Mr Booth: I think you have to understand
before you start exploring for hydrocarbons and wanting to develop
and appraise hydrocarbon accumulations, what the terms and conditions
will be to go across that infrastructure. What you do not want
to do is find your hydrocarbons and then you find someone who
owns the infrastructure wants to take what they might regard as
a fair share, and what I might regard for my shareholders as a
disproportionate share of the risk I have taken. My view is that
that happens quite a lot.
Q10 Paddy Tipping: We have a Government
that is becoming increasingly interventionist; is this an area
in which it ought to be more involved?
Mr Booth: I think they should seriously
consider that. I am not a great fan of intervention myself, but
we have an extensive infrastructure in the North Sea and we do
need to make sure that it is made available for those who wish
to produce hydrocarbons that still need to be found and still
need to be produced, and there is a role there for Government.
Q11 Mr Weir: Perhaps I should mention
my interest as another vice chair of the Oil and Gas Group, but
you say in your submissions that there should be a common carrier
status for infrastructure. Can you explain to us what you mean
by that?
Mr Booth: It means that there is
effectively guaranteed access to major infrastructure. It is something
that is quite common in the Gulf of Mexico. The US is not known
particularly for interventionist policies, but it is the way you
ensure you get access to that infrastructure, and you pretty much
understand the terms under which you do.
Q12 Mr Weir: But who imposes the common
carrier status? Is it a—
Mr Booth: I believe it has to be
a regulatory event. It is quite clear from the North Sea that
there is one pipeline system that effectively has a monopoly over
large parts of the North Sea.
REFUND OF
EXPLORATION ALLOWANCES
Q28 Anne Main: What can be done to help?
What are you asking for in terms of financial support or intervention
or alteration?
Mr Booth: I do not think we are
asking for support. In our submission we have the example of my
own company. We have £25 million of tax pools, which are
costs we have sunk into the North Sea. If we were a producer we
could claim those back straight away, offset against our income;
however, I cannot get into a cash-flow producing situation because
I cannot either borrow money or get more equity to develop the
fields I have found.
Q29 Chairman: We are going to look at
the fiscal regime.
Mr Booth: It is a fiscal regime
issue. I guess I am just asking for those funds to be brought
back to me so that I can reinvest them in the North Sea.
Q30 Anne Main: If there was some sort
of conversion, like a planning conversion, for change of use for
the field that you found to go to carbon capture storage, something
like that would be—
Mr Booth: That is certainly one
issue, yes.
Q31 Anne Main: Change of use for the licence.
Mr Booth: Yes. The other one that
I mentioned is that I have money tied up effectively with the
Government, which if I were a producer would come straight back
to me, as an offset against my tax bill. I cannot achieve those
funds because I cannot get into a position to produce cash, because
the banks do not want to lend me money to develop the fields I
have found. So my equity investors can see that investing in smaller
companies like this is not efficient, because half the money—we
are on a 50% tax regime—gets stuck until I can get the cash
flow, but I cannot get the cash flow because the banks will not
lend me money to develop the field that we found. That is exactly
where I am right now."
As we frequently say undeveloped oil in the ground
does not generate taxes, create jobs or secure energy supply.
VALUE ALLOWANCE
(WHO GETS
WHAT AND
HOW)
For this proposal to lead to new activity Value
Allowance must be material. With a material targeted approach
the possibility of moving stalled projects forward is improved.
If the benefit is spread too thinly the initiative is likely to
fail.
The Value Allowance will be deducted from the
20% Supplementary Corporation Tax. Targeted projects and levels
of allowance are as follows:
— Heavy Oil (less than 18°
API gravity and or greater than 10 ctp viscosity at reservoir
temperature.) The Value Allowance would be £10 per BOE of
reserves at the point of Field Development Approval capped at
a reserve figure of 200 million BOE.
— High Pressure High Temperature
(HPHT) (Temp. greater than 300°F [149°C] and or
a pore pressure of at least 0.8 psi/ft (15.3 lbm/gal) or requiring
a BOP with a rating in excess of 10,000 psi [68.95 MPa] ). The
Value Allowance (same as Heavy Oil) would be £10 per BOE
of reserves at the point of Field Development Approval capped
at a reserve figure of 200 million BOE.
— Small Fields (below 25 million
barrels of oil equivalent (BOE which are neither Heavy Oil nor
HPHT)), A flat allowance of £100 million for fields under
20 million BOE tapering to zero between 20-25 million BOE. The
net effect to the project of a Value Allowance of £100 million
would be £20 million with a discounted Net Present Value
of approximately £15 million.
The key issue in all developments is the return
on capital when compared with the risks undertaken. The Heavy
Oil and High Pressure High Temperature (HPHT) projects will incur
larger capital expenditure and hence a greater Value Allowance
will be needed.
We hope this is helpful and if there is any
further information you need please contact me.
April 2009
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