Supplementary memorandum from AMEC (UKOG 12A)

 

Thank you for your recent invitation to offer our view on the 2009 Budget changes in relation to the oil & gas industry and their likely effectiveness in stimulating economic activity.

 

As you will no doubt be aware, AMEC is a significant player in the supply chain of this industry and a substantial employer both in the UK and worldwide. Ours is a people business (employing over 22,000 globally - 7,000 of them in the UK) and as such we have a keen interest both in the wealth and jobs created by a healthy industry.

 

We offer the following comments in relation to Budget Notes BN09 & BN10 which pertain to the North Sea Fiscal Regime.

 

1. BN 09 - Facility Change of Use

 

We applaud the changes in relation to RFCT & PRT intended to stimulate change of use of existing facilities. We trust this will remove some of the obstacles our clients currently face in such a change in business case.

 

In relation to the objective here (which we understand address the questions of both security of supply & economic activity) we would highlight a related practical consideration - that being the physical condition and integrity of offshore installations which have operated in a hostile saline environment, many for in excess of 20 years. Most of these installations therefore face a substantial maintenance cost burden.

 

We believe that the measure suggested in point 3. below would act in a complementary manner to the current fiscal changes in pursuit of these objectives by encouraging re-investment in the longer term integrity of existing facilities.

 

2. BN 10 - Incentivising Production

 

Again we applaud the initiative to introduce a Field Allowance provision to encourage developments - clearly such relief will offer some encouragement to develop certain technically and economically challenged fields.

 

The effectiveness of this stimulation on the real economy remains to be seen and we trust that DECC, HMRC and the government will remain open to considering extending the scope of the allowance to other marginal developments.

 

We note also that whereas certain other UK developments remain economic without the Field Allowance, they compete for finance in a global market. The limited scope of the allowance has done nothing to improve favourability for UK oil & gas developments in a completely transferable and comparable business.

 

3. Cessation of Production (CoP) Optimisation - Late Life Field Allowance

 

It is clear that stimulus effect of measures BN09 and BN10 will have some time lag before any benefits are felt in the real economy. However it is clear that the industry (and its underpinning fiscal regime) must urgently address the question of low oil price and cash flow in this mature basin if irreparable damage to future reserves and security of supply is to be avoided.

 

The following suggestion is a prompt tactical response which, if implemented, will quickly serve to increase activity, safeguard the long term integrity of facilities and thereby safeguard the ability to produce future reserves through existing infrastructure. Critically, it will have no adverse impact on the exchequer (beyond that already being felt through low oil price).

 

We recommend that the 2009 Field Allowance provision be extended to include Redevelopment Plans for existing operating fields scheduling CoP. In the current environment, protracted low oil price offers an unhealthy cash flow situation whereby the predominating consideration in CoP scheduling is deferral of decommissioning cost rather than facilitating production of adjacent or infill reserves.

 

The value allowance for a specific field could simply be determined based on the incremental cost (both capex & opex) required to achieve a redevelopment production profile. CoP strategies submitted to DECC could form the baseline cashflow position and therefore there would be little extra workload on either operating companies or government bodies.

 

Fields which would otherwise have permanently terminated production would make a continuing Corporation Tax contribution while simultaneously extending infrastructure life for adjacent reserves. Available cash could then be re-invested in UK developments.

 

Up front capital investment for such redevelopments will be comparatively small, thus project value / investment ratios will stand healthy comparison with international project ranking.

 

4. Decommissioning

 

We note the government / HMRC decision not to act upon Oil & Gas UK's recommendations in relation to decommissioning security (letter dated 3rd April 2009).

 

 

We also reiterate AMEC support for the proposed industry body Decom North Sea and look forward to participation in the dialogue to achieve a world leading decommissioning industry - clearly the fiscal regime plays its role in this.

 

We believe that improved preparedness for decommissioning within this basin is essential if an expensive and inefficient decommissioning phase is to be avoided. Indeed, uncertainty around the decommissioning process and caution towards cost provision may very well be tying up cash unnecessarily and inhibiting the development investment we all want to see in the UK industry.

 

We trust you find the views above helpful and constructive.

 

March 2009