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Confidence returning to region

Hammond to offer more help for North Sea oil

Deirdre MichieChancellor Philip Hammond is expected to use the Budget to encourage transactions in the North sea oil and gas industry.

Mr Hammond will unveil a consultation on tax incentives that will help keep oil fields productive for longer. A panel of experts will be appointed to examine the issue.

His decision follows calls by the industry for further help to encourage ‘urgently needed’ fresh capital in the North Sea.

Industry leaders say that confidence is slowly returning to the region, but it needs help amid warnings that investment is continuing to fall.

Industry body Oil & Gas UK says that after two years of driving down costs and boosting productivity the UK Continental Shelf is now in better shape to compete for investment.

Domestic production continues to rise and unit costs are improving, according to the group which today publishes its Business Outlook Report 2017.

It cautions against suggestions of an upturn, pointing out that investment remains 3% down on the previous year and exploration remains at record lows.

Even so, it points to a 5% rise in output and says production has now been rising since 2015, bucking a 15-year trend of decline. It expects production to continue rising over the next two years.

This is due to new development which has seen 34 fields brought into production since 2013, as well as improved productivity in existing fields.

A further 13 to 18 new fields could start producing this year. By 2018 recent start-ups are expected to contribute up to 600,000 barrels of oil – around a third of UKCS production.

Measures to bring the industry’s costs under control are taking effect. Average unit operating costs have improved by half within two years from $29.70 a barrel to $15.30 a barrel.

Capital efficiency is also improving. Development costs for newly approved projects have reduced by more than 50% since 2013 and are expected to be lower again in 2017 reflecting costs trends as well as investment constraints.

Oil & Gas UK chief executive Deirdre Michie, said: “Confidence is slowly returning to the basin.”

“The revival is led chiefly by exploration and production companies which may collectively see a return to positive cash-flow for the first time since 2013, provided costs are kept under control and commodity prices hold.

“However, this is unlikely to translate immediately into reinvestment or increased activity. The challenges for the basin ahead, particularly for companies in the supply chain, are still considerable”.

Brent oil fieldOil & Gas UK is therefore asking the Treasury to extend the investment allowance to operational activities that are focused on maximising economic recovery.

“While the reduction in headline tax rates of recent years has helped create one of the most competitive fiscal regimes for upstream investment, certain adjustments are still required to drive investment over the longer term,” said Ms Michie.

As companies continue to adjust to lower commodity prices, they remain focussed on near-term financial rebalancing and consolidating recent efficiency improvements. Only a limited number of projects are securing funding.

As a result, investment is expected to continue falling. In particular, the wave of fresh capital investment seen in recent years is declining rapidly as fields currently in development come on-stream. The industry anticipates a total spend of almost £17 billion in the UK this year, around 3% lower than the previous year.

Exploration remains at record lows and the basin urgently needs fresh capital to stimulate activity to unlock the UK’s estimated remaining resource of up to 20 billion barrels of oil and gas.

The impact on the supply chain has been particularly hard. Companies have seen an average 30% fall in revenues over the last two years and are turning increasingly to overseas markets to offset the shortfall in domestic activity.

Exports of goods and services are expected to be around £12 billion in 2017. Although overseas revenues have fallen by £4bn in since 2014, reflecting the contraction in global spend, they now account for 43% of supply chain revenues, demonstrating the importance of international markets.

There are indications however that the bottom of the cycle may have been reached and that business may at last begin to stabilise.

While $4bn worth of asset and corporate deals announced since January have been a significant vote of confidence in the basin, Oil & Gas UK believes that more can be done to facilitate the transfer of assets in the basin and so stimulate additional investment. This is why industry is asking the Treasury to revise the tax treatment of decommissioning liability.

There has been a 3% uplift in the price of shares in supply chain companies, reversing a two year decline.

Moreover, approval for capital investment could rise this year with more than £1 billion of new field developments being sanctioned. A number of multi-billion-pound investment opportunities are also under consideration in 2018 and 2019.

Ms Michie added: “The Government’s proposals for an Industrial Strategy is therefore a timely intervention. Oil & Gas UK will be working to ensure the oil and gas sector remains at the heart of UK industrial policy and present a business case for a sector deal.

“We need to ensure the competitiveness of the supply chain and build resilience through diversification and exporting. Such an approach will enable the whole industry to continue contributing to overall UK productivity and economic performance.”

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