The government has today (Friday 20 March) outlined a major package of support for the oil and gas industry following Wednesday’s Budget announcement.
The new Oil and Gas Authority (OGA) will be given a range of powers to ensure it has the ability to help maximise the economic recovery of the UK’s oil and gas industry.
Under the proposals published today, the OGA’s powers would include the ability to issue fines of up to £1m, to revoke licences where necessary, as well as having the right to attend meetings and have access to data to enable it to spot and resolve issues at an early stage.
The government has also outlined the design of the basin-wide new oil and gas Investment Allowance and published the summary of responses to its consultation.
A fast-tracked consultation on the Investment Allowance ran from January to February and the measure will be introduced in Finance Bill 2015, applicable to investment incurred from 1 April 2015. This measure will drive new investment, simplify the existing system of offshore field allowance significantly and provide greater certainty for investors.
This follows the government’s announcement at Budget that it would cut the Supplementary Charge from 30% to 20% and reduce Petroleum Revenue Tax from 50% to 35%, as well as introduce a new Investment Allowance to drive new investment and invest £20 million in a programme of seismic surveys to boost offshore exploration.
Chief Secretary to the Treasury Danny Alexander said:
The UK’s oil and gas industry is a hugely important employer and investor in Scotland and across the UK, which is why we announced a package to encourage £4 billion of additional investment at Budget, and why today we’re announcing that the new Oil and Gas Authority will have the powers it needs to maximise the ongoing strength of the industry.
This demonstrates the government’s long term commitment to supporting the North Sea oil and gas industry, and ensuring that both the industry and the nation continue to benefit from the billions of barrels of North Sea oil that still remain to be extracted.
Secretary of State for Energy and Climate Change Ed Davey said:
We have worked hard along with industry to establish this new regulator as part of the government’s commitment to the North Sea and the hundreds of thousands of jobs it supports.
We’ve moved quickly to get the OGA up and running to help the industry with the challenges it is facing, but it’s also vital that we give it the powers it needs to be an effective regulator. It was important for us to work with industry to get that right – and I think what we have developed together will enable the OGA to be very effective.
Exchequer Secretary to the Treasury Priti Patel said:
Industry asked us to prioritise the Investment Allowance and we have delivered, fast-tracking its design and implementation at Budget. Existing field allowances incentivised £14bn of investment and this is a wider ranging, more powerful tool to encourage further activity in this vital sector.
The Wood Review Call for Evidence took place in Autumn 2014, when industry and key stakeholders came together with the government to share ideas on how the recommendations of the Wood Review should be implemented. This process also highlighted the skills, capability and regulatory powers necessary for the OGA to be a strong and effective regulator.
To support its role as a trusted facilitator, catalyst for change and collaboration within the industry and regulator, the government response to the call for evidence recommends that the OGA has the powers to:
- implement sanctions in situations where companies do not comply with the terms of their licences or with maximising economic recovery. Sanctions could include improvement notices, and fines of up to £1m, with an option to make regulations to increase the limit to £5m if necessary, or ultimately to revoke licenses
- provide dispute resolution, where required, in a way which prioritises those disputes that present significant strategic risks to the successful recovery of oil and gas from the North Sea
The government has been working closely with the North Sea industry over the last year to establish the new regulator. Andy Samuel took up his position as its Chief Executive in January, and Sir Patrick Brown was appointed as chairman earlier this month.
Chief Executive of the OGA Andy Samuel said:
In my recent call to action report, I highlighted the very real challenges facing our oil and gas industry, and the need for continued collaboration across industry, government and the OGA.
It is important that the OGA has appropriate regulatory powers to support its work as a trusted facilitator. I’m pleased that industry has been involved in the process to inform the legislation which is being drafted and that our work to create an effective, independent regulator is on track.
Equally important is the commitment of all parties to maximise economic recovery through collaborative commercial behaviours in the North Sea, to safely improve efficiency, deliver a competitive cost base and create an operating environment that attracts investment now and in the future.
The OGA was one of the recommendations of the Wood Review and it will become an Executive Agency on 1 April. Subject to the will of the new government, a bill to establish legislation setting out its role and powers will be introduced in the first session of the new Parliament.
At Budget earlier this week, the government announced that it will encourage over £4 billion of additional investment in the UK’s oil and gas industry over the next five years by:
- introducing a new Investment Allowance to drive new investment, simplify the existing system of offshore field allowance and provide greater certainty for investors. The allowance will be available on investment expenditure incurred after 1 April 2015.
- reduce the Supplementary Charge from 30% to 20%, building on the 2% cut announced at Autumn Statement, to send a strong signal that the UK is open for business and ensure the UK Continental Shelf remains competitive as the basin matures. The change will take effect from 1 January 2015.
- reduce Petroleum Revenue Tax from 50% to 35%, to encourage investment in older fields and the key infrastructure they support. This change will have effect for chargeable periods ending after 31 December 2015.
- boost offshore exploration by providing £20m of funding for a programme of seismic surveys in under-explored areas of the UKCS in 2015-16.
- make sure the OGA has the powers it needs to scrutinise companies’ plans for decommissioning programmes to ensure they are cost effective. The government is also going to work with the OGA and the industry to ensure the supply chain is equipped to take up the opportunities offered by timely decommissioning.
This package is expected to lead to over £4bn of additional investment over the next 5 years and at least 120 million barrels of oil equivalent of additional reserves, increasing production by 15% (the equivalent of 0.1% of GDP) by 2019-20. It will provide certainty for investors and create the right conditions for the basin to flourish and deliver maximum economic benefits for the UK.