Oil sector challenges remain despite confidence returning, leaders warn

Confidence is slowly returning to the oil and gas sector but “considerable challenges” remain, industry leaders have said.

Ahead of this week's Budget, Oil & Gas UK are calling for an extension to investment allowances to maintain activity.

Last week, the Scottish Government challenged the Chancellor to “step up to the plate” and support the oil and gas industry by improving decommissioning tax relief for the North Sea.

Oil and Gas UK's business outlook report 2017 said a two-year drive to “improve efficiency, streamline costs and boost productivity” has been successful.

Production is said to be rising with 1.73 million barrels of oil equivalent per day (BOEPD) in 2016 and the figure could rise to 1.9 million by 2018 with investment, according to the report.

It is anticipated between 13 and 18 new fields could start producing this year that could contribute up to 600,000 BOEPD by 2018.

Oil and 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 cashflow 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.

“As one means to help address this, Oil & Gas UK is 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.”

At current rates, investment in the UK continental shelf is expected to be about £17 billion this year, 3% lower than last year.

Oil and Gas UK said 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''.

Ms Michie added: “It is crucial that these projects are progressed efficiently through to development and new ones matured to avoid a potentially significant production decline after 2020 and provide much-needed business opportunities for the supply chain.

“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.”

WWF Scotland director Lang Banks said: “While our economy will continue to rely on oil and gas for some time to come, this should not mean that the fossil fuel industry should be handed even more in the way of tax-breaks and subsidies to keep drilling.

“The climate science is clear that the vast majority of known fossil fuels need to remain in the ground and not burned.

“If there are to be any type of incentives they should be to support a just transition that enables us to harness the engineering skills currently deployed in the oil and gas industry and apply them to supporting clean renewables instead.”

An HM Treasury spokesman said: “The UK Government is fully committed to the oil and gas industry and has provided unprecedented support to the sector over the past two years, including a £2.3 billion package of support.

“As a result, the UK is now one of the best places to invest in oil and gas in the world.

“We do not comment on budget speculation.”