Speech

Danny Alexander's speech to Oil and Gas UK

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

The Chief Secretary to the Treasury on the Oil and Gas fiscal review.

The Rt Hon Danny Alexander

It is wonderful – as ever – to be back in Aberdeen.

The last time I was here was exactly four weeks ago – when I had a series of meetings with key players in the oil and gas industry, and I then spoke to the Aberdeen, Highlands and Islands branch of the Energy Institute.

I said that what was needed here in Scotland, after the financial crisis and after the momentous referendum campaign, was a period of certainty and of stability.

I said that the story of North Sea oil and gas still had a long way to run.

And I said that we as a government would do our utmost to give your industry that certainty, that stability, over the coming years.

Recent events have proven why stability is so necessary.

The recent falls in the oil price have made clear that the assumption that the public finances - either of the UK or an independent Scotland - would be kept afloat by future North Sea revenues is not realistic.

And it is very welcome that the Smith Commission has decided that taxation for the North Sea should not be devolved.

Because when you have this level of volatility in your tax revenues, it is only a large and diversified economy that can absorb it – and continue to invest in it.

So the days when government regarded the North Sea primarily as a means of raising revenue are over.

You are, first and foremost, a vitally important economic asset. One which supports jobs and growth and investment - and one which we will do what we can to support.

So we can squeeze every last drop we can out of the North Sea.

That’s the fundamental shift.

That’s how we can maximise economic recovery of the natural resources of the UK continental shelf, maintain jobs and keep the economy – particularly the local economy – buoyant. And that’s how you can continue to make the most of the resources out there.

Yesterday’s headline cut of the Supplementary Charge from 32% to 30% sent a vitally important signal: the North Sea is open for business.

And we will not stop there. As soon as fiscal conditions permit, we are committing to lowering that even further, to get more investment and encourage greater production.

Earlier this year, we commissioned Sir Ian Wood, one of the world’s foremost oil industry experts, to examine how we could maximise this country’s economic recovery.

His response was twofold: get the right regulator in place, and get the right fiscal regime.

So we set up the regulator in the form of the Oil and Gas Authority – up and running next year, based right here in Aberdeen, under the expert stewardship of Andy Samuel.

And we’ve carried out the Oil and Gas Fiscal Review, to examine how we can build on the success of our existing field allowances, and put in place a regime which is internationally competitive.

Oil & Gas UK estimate that our system of allowances has been transformational in incentivising North Sea investment.

Allowances were directly responsible for £7 billion of last year’s record-breaking £14.4 billion investment in the North Sea. And this investment supported around 52,500 jobs in Scotland and the same again in the rest of the UK.

Yesterday, at the Autumn Statement, we announced a new allowance: for high-pressure, high-temperature oil and gas projects.

This allowance – known as the “cluster area allowance”, because it incentivises companies to invest and explore in the area surrounding individual fields – will reduce the tax rate on a portion of the company’s profits from 62% to 30%.

Companies will pay at the reduced rate on profits equal to 62.5% of their capital spend on qualifying projects. For every £1 billion spent, companies will get £200 million in tax relief.

This will encourage the exploration and development of one of the biggest fields in the Continental Shelf, Culzean: creating 3,500 jobs directly and along the supply chain; generating over £3 billion of capital investment; at peak, providing 6% of UK gas demand; and helping our supply chain to lead the world in this new technology.

In about an hour’s time, we will be formally signing this allowance with industry.

And I hope that, over the coming years, it will indeed be the “game-changer” Oil & Gas UK (OGA) have called it.

Also today, we publish our initial conclusions to the Oil and Gas Fiscal review – and I am pleased that we are here in Aberdeen to announce further reforms to the fiscal regime. Reforms to generate investment.

Priti has already announced the reforms we are introducing to the areas of infrastructure and decommissioning. I would like to set out three more.

First, we are changing the system of Field Allowances. We will be introducing a basin-wide Investment Allowance, to simplify and replace the existing system of offshore field allowances over time.

Field allowances, though extremely useful in themselves, had the disbenefit of adding complexity to the regime. Indeed, there were so many of them that at the point of an investment decision being made, it was often difficult to tell which particular allowances would apply.

So the new Investment Allowance will be based on a company’s costs rather than the physical characteristics of a field – which in turn will give you greater certainty on future tax treatment at the early stages of project development.

We’ll be consulting on this at the start of next year, with a particular focus on how we transition to the new system and how it can best support near field and brownfield developments, and new technologies and techniques such as Enhanced Oil Recovery.

Second, we are taking action to encourage companies already investing.

As the Chancellor announced yesterday, we will extend the ring fence expenditure supplement from 6 to 10 years for offshore oil and gas activities.

This would help the short-term cash flow of companies looking to invest but which do not currently have income from production. We know that cash flow is an issue for some, and we will consider any more detailed suggestions from the industry on measures to support cash flow.

This measure will be taken forward as part of Finance Bill 2015.

Our third area of reform is in exploration – where rates are, unfortunately, at historically low levels.

I know that access to good quality seismic information has been an issue for the industry.

So I am delighted to announce today that government will provide financial support for seismic surveys in under-explored areas of the UK Continental Shelf. We’ll be working with industry and the OGA on options for shared funding models, and we will set out our conclusions at Budget 2015.

In addition, we will be working with the OGA once it is up and running to look at how we can support exploration through the tax system. This could be through a tax credit or similar mechanism, and will have to be carefully targeted. We will open discussions with industry and the OGA early in 2015.

We want to reward investment in the North Sea at all stages of the industry life cycle.

Together, these reforms will do exactly that.

They will make the fiscal system more competitive, simple and predictable, and send the message out loud and clear that we are open for business.

And they certainly do not represent the end of the story.

As the UK’s economy grows, and as our recovery strengthens, our direction of travel will be to implement further measures to increase investment.

So I look forward to our continued dialogue as we consult on these measures, and beyond.

As chief secretary to the Treasury, a big part of my job is to say ‘no’ when other departments coming asking for money. That is especially true when times are tough financially.

By taking the tough decisions, we also give ourselves the space to do the right thing where it is evidently in the national economic interest.

This week we’ve shown that again, with our decisions to back working people with tax cuts and to invest in the infrastructure crucial to our country’s economic success.

Your industry is absolutely in that category. I know from my many discussions with Sir Ian and others, that this is a crucial moment for your industry.

I hope you will look back on today as marking a significant strategic move by the Government.

Today we are saying a resounding “yes” to the North Sea oil and gas industry.

Yes, we will help you make the most out of North Sea resources.

Yes, we will help business come here and invest.

And yes, we will continue to add to these measures and safeguard the long-term future of your industry.

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

You have a role to play, and so do we.

Your role is to boost production, explore new fields, and work together in smarter and more efficient ways;

Our role is to support you: providing the right regulator, and giving you the right fiscal regime.

Yesterday and today, you have seen proof of our commitment to putting in place a fiscal regime that maximises investment.

I am not going to make predictions about what the long-term global picture might be for the oil and gas industry.

But I do know that by working together, we can get the most out of the North Sea in the years to come.

And that will be good both for your business and for the wider economy.

Read the Exchequer Secretary, Priti Patel’s speech to Oil and Gas UK.

Published 8 December 2014