Speech

Chief Secretary to the Treasury on the UK's oil and gas industry

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Chief Secretary to the Treasury, Danny Alexander at the Energy Institute Aberdeen Highlands and Islands branch annual dinner.

Good evening – and thank you for the warm welcome tonight.

One reason I was so pleased to receive this invitation is because here in the City of Aberdeen you are right at the centre of a hugely important industry – this really is the home city of North Sea oil and gas.

This is a sector which is a huge economic asset for our country – supporting 450,000 jobs and contributing £4.7bn in upstream taxes to the Exchequer. Perhaps a smaller sum than some have claimed, but still very important to the country.

It’s the largest investing industrial sector in the UK. Investment reached an all-time high last year of £14.4bn. Including in renewable energy, this sector is generating jobs and growth.

So this is a sector which adds a huge amount to the local and regional and Scottish and UK economies.

My position, as both a Highland MP and as an economic Minister in the UK is clear: yours is an industry we want to support. Long term.

So it has been great to come here, meet with a number of companies in the sector, hear your takes on what the challenges are and how we can best meet them.

And it is a particular pleasure to speak to you on the 100th anniversary of the Energy Institute – in the Marcliffe Hotel, as much of an Aberdonian institution as Ma Cameron’s on Little Belmont Street.

I know that historically, predictions about oil and gas have sometimes been a little off the mark…

Like the anonymous executive in the Anglo Persian Oil Company who in 1926 commented that “Saudi Arabia appears devoid of all prospects for oil”!

But I think we can be sure that oil and gas will be important to the UK for quite some time: estimates indicate that 70 per cent of our energy needs will still be met by oil and gas in 2030.

And much of that will come from the UK Continental Shelf. Earlier this year Sir Ian Wood, one of the world’s foremost oil industry experts, said that there are between 15 and 16.5 billion barrels remaining to be extracted from the North Sea.

That’s not quite the 24 billion barrels the SNP were basing their sums on, but it’s still a significant figure, representing a value in the trillions and at least 40 years’ worth of drilling activity remaining.

And the other point that Sir Ian made – recognising the challenges involved – was that if we get the regime right, we can really make the most of our remaining hydrocarbons.

Our task, working together, is a simple one: to squeeze every last drop we can out of the North Sea – because that’s how we maximise our economic recovery.

The recommendations in the Wood Review, commissioned by us and published earlier this year, could, if implemented fully and rapidly, deliver the equivalent of 3-4 billion barrels of oil more than would otherwise be recovered over the next 20 years.

By any reckoning that’s a major prize.

I accept that we have one of the most mature basins in the world and that we’ve picked many of the low-hanging fruit over the last five decades. There are considerable challenges the industry faces and we should be realistic about them.

But the North Sea still has discoveries to offer.

To allow you to invest in economic but commercially marginal projects, we’ve made some important changes to the fiscal regime – particularly for exploration in smaller and more technically challenging fields.

But as well as fiscal incentives, we have taken a step back and looked at the regulatory system as a whole.

One of the key recommendations of the Wood Review was setting up a new, stronger, more powerful regulator, the Oil and Gas Authority.

Next year the Oil and Gas Authority will be fully up and running, based right here in Aberdeen.

Today, I’m delighted that we are in a position to announce the next step forward.

The first Chief Executive of the Oil and Gas Authority will be Andy Samuel.

I know that Andy – who has had an impressive career at BG Group, most recently as Managing Director of BG Group’s Exploration and Production in Europe – will bring real depth and expertise to the role.

The creation of the OGA comes at a critical time for the UK’s oil and gas industry. They will be examining issues which are of huge current relevance – cost reduction, decommissioning costs, and production efficiency, and how government, the OGA and industry can work together to maximise economic recovery.

The other important piece of work for your industry will of course be the findings of the Oil and Gas Fiscal Review.

This, as you will know, asked the oil and gas industry to submit their thoughts on the future of the UK oil and gas tax regime – so we can continue to encourage long term investment in the North Sea and make the most of our resources.

I am grateful that so many of you have done so. We are listening carefully.

And during the call for evidence, we’ve heard a lot of positive messages from industry…

…about elements of the fiscal regime, including our generous capital allowances;

…about the work we’ve done in recent years to incentivise marginal projects through field allowances;

…and about the steps we’ve taken to provide greater certainty over decommissioning through the Relief Deeds.

We’ve also heard a strong message that the regime will have to evolve in order to maximise economic recovery. Recognising that as you compete for global investment, a stable and supportive fiscal regime is essential.

We’ve taken that feedback on board.

The findings we will be publishing in four weeks’ time, alongside the Autumn Statement, will have a strong focus on supporting the long-term competitiveness of the regime – through a lower tax burden over time, and through measures to support key stages of the industry lifecycle – so that we maximise the economic recovery of North Sea Oil and gas resources.

Obviously I can’t pre-empt these findings now, but our direction of travel is one which I hope industry will find positive.

We want to build on what works: if we want to get investment in the most difficult fields, our tax system will have to evolve.

I should add that given the complexity of these issues, we will need further consultation and close working with the new Oil and Gas Authority. So this review won’t stop at Autumn Statement. My Treasury colleague Priti Patel will be continuing that dialogue in the New Year, working together with Andy and the OGA.

I’ve now spent just under four and a half years as Chief Secretary to the Treasury.

Dealing with the biggest budget deficit in peacetime history, and the painful effects of a financial crash which affected households up and down the country.

And doing so in an atmosphere summed up by that famous note in the drawer of my desk: “There’s no money left”!

During that time, I’ll be honest, we’ve had to make some really difficult decisions. Decisions which I hope no Chief Secretary is put in the position of making – ever again.

But the goal is simple. Get public finances back on an even keel. Introduce positive policies to secure long-term economic growth. Get more people into work. Create, in other words, the right conditions for lasting, sustainable prosperity.

My motivation – my end-game, if you will – is to build a stronger economy in a fairer society, in which everyone has the opportunity to get on in life. One in which the benefits of our economic recovery are widely shared, and living standards rise for people in every corner of the United Kingdom.

For example, as a government, we have done more than any other in modern times to help the public and UK business with regard to the cost of petrol and diesel.

We cut fuel duty by 1p in 2011 and have confirmed that it will remain frozen for the rest of this Parliament. That means that petrol and diesel prices will be 20p per litre lower by the end of this parliament than if we had stuck with Labour’s fuel escalator plans.

And that has come at a considerable cost to the Exchequer – some £22.5 billion over the parliament to 2015-16. These are major sums, particularly when we still need to focus on continued deficit reduction.

But government is not the only player in this area.

Industry too has a role.

Since June, the cost of a barrel of crude oil has fallen by 27 dollars.

Forecourt prices, meantime, have fallen by 6.75p a litre.

Especially in the current economic circumstances, people would rightly be angry if they feel that pump prices don’t fall as much as they should on the back of falling oil prices.

I believe it’s called the Rocket and Feather effect.

The public have a suspicion that when the price of oil rises, pump prices go up like a rocket.

But when the price of oil falls, pump prices drift down like a feather.

This has been investigated before and no conclusive evidence was found.

But even if there were a suspicion it could be true this time, it would be an outrage.

So I will be writing tomorrow to the major players involved in the distribution and sale of petrol and diesel, seeking their assurance that they are doing all they can to pass on the benefit of falling oil prices as quickly as possible.

When the price of oil falls, the public have a right to expect pump prices to fall like a stone, not a feather.

I have made sure over the last four years that government has helped with the cost of fuel. And when the oil price falls, industry must do all it can to help too. It is in your interests that this happens.

So I very much welcome the positive steps taken by supermarkets this morning responding to some of the calls that I’ve been making to pass on the fall in crude oil prices. And I hope that we will see more of that happening over the coming weeks.

A few moments ago I stressed the words “every corner of the United Kingdom”. Because I know that there are some areas – not just in the Highlands and Islands but across the UK – where there are specific local difficulties which it’s only fair we address.

If you live in an area where the cost of transporting fuel means prices are much higher, it tends also to be an area where a car is a necessity. And it’s likely that the housing stock is older, less well insulated, and heated by very expensive heating oil. This creates a vortex of higher household bills.

I am determined that we address this. That’s why last year we announced we were taking forward work to extend the rural fuel rebate scheme.

And that’s why I am looking closely at measures to help other households – those, for example, who are off the grid, or those affected by the 2p per unit distribution costs surcharge in North Scotland, as the Press and Journal has highlighted recently.

I can’t say now what the right answer is, because the work I’ve tasked my officials with is ongoing, and it’s not simple.

But these are the kind of areas I am looking at. We have a duty to help those of us who are struggling the hardest.

And we should do so in a way that is good for the customer and good for industry.

I know that for your industry, the issue of Scotland’s future in the UK is a primary concern.

The referendum – doesn’t it seem like a long time ago? – was a momentous moment.

We kept the UK together – one of my proudest moments in public service.

And I am grateful for those in the industry who spoke up and said yes, it’s only by staying together that we can provide the stability to sustain production and investment in the North Sea. Who pointed out that the bigger and more diverse your economy is, the more it can help smooth the volatility in North Sea tax receipts.

Now we are in the next phase – delivering the changes Scotland wants. As you all know, the UK government has asked Lord Smith of Kelvin to oversee the process for deciding which powers currently reserved to the UK Parliament should be devolved to the Scottish Parliament.

As a Scottish and Highland MP, it is my personal responsibility to ensure that we deliver a positive, substantial package which will maximise Scotland’s prosperity.

But in my view that should not include devolution of oil and gas taxes.

The industry is at a crossroads. There are plenty of challenges, I know, but there are also significant opportunities. Now more than ever, a stable, consistent regime across the whole of the UK Continental Shelf is absolutely vital for you.

The disruption and uncertainty of breaking up the North Sea regime would – in my view – be the wrong thing to do.

This year we celebrate 100 years since the Energy Institute’s oldest founding institution was formed.

Much has changed. But the enterprising and go-getting spirit of people in the energy industry hasn’t changed.

I am actually very positive about the future of oil and gas, and the renewable sector, here in the North of Scotland.

I am very aware that what is desperately needed now – after the financial crisis and after that momentous referendum campaign – is a period of stability and certainty.

And we will do our utmost to provide that stability and certainty for you.

Government and industry have key roles to play, and we need to work together:

Your role is to get costs down, discover new fields, and become more efficient;

Our role is to get provide the right tax regime and – through the OGA –the right regulator.

And together, we can get the most out of our energy – more exploration, more renewables, renewed growth, and continued success for a great British Industry.

Thank you for listening.