The Exchequer Secretary to the Treasury on the Oil and Gas fiscal review.
Good morning. It’s great to be back in Aberdeen straight after the Autumn Statement to unveil the measures we are putting in place to support the North Sea oil and gas industry.
Stabilising the right path for the future of the industry is crucial, and I’d like to thank you all for your engagement on this. I strongly believe we are building a solid relationship that will build future success.
Yours is an industry we want to support – for the long term.
We know that the economics of the UK Continental Shelf have changed fundamentally in recent years.
We know that average operating costs have risen by 60% over the past three years.
We understand that the realities of a mature basin mean that projects are more marginal and are more sensitive to falls in oil prices, such as the one we’ve seen this year.
But we also know that the prizes in the North Sea are still significant.
Continuing to attract investment into the UK industry is critical. This government is absolutely committed to supporting the investment needed to find the rest of this oil and to develop the basin.
That’s why earlier this year we committed to reviewing the long term future of the oil and gas fiscal regime. And today, we are publishing this plan for the fiscal regime building on the work and discussions we’ve had together.
Importantly, we are taking action across the whole life cycle of North Sea activity.
Firstly, on infrastructure. It is vital that assets that are key to the future of the basin are well maintained – not least because badly maintained and ageing infrastructure harms production efficiency.
Action by the industry and the Oil and Gas Authority (OGA), which we set up and which will begin work early next year, will of course be essential in this area.
But the response to the review highlighted that fiscal issues, such as “tariffs” and asset transfers, could also help.
So we will consider options for reforming the fiscal treatment of infrastructure – and consult further with industry in 2015.
Secondly, decommissioning – which, in the coming decades, will be increasingly important, as the UK Continental Shelf (UKCS) moves into the decommissioning phase ahead of many other basins.
The risk here is that the North Sea, owing to its maturity, will often have to be the site of new pioneering methods. Industry will therefore need to develop new operating models and bring in skills and expertise.
The opportunity here, however, is immense. Get this right, and we will develop highly valuable – and saleable – expertise here in the UK, and reap great rewards down the line.
So it will be vitally important to attract new entrants and specialists into the basin to take on decommissioning work.
Currently the tax system does not encourage companies to do this. We will therefore examine options to improve access to decommissioning tax relief to encourage new entrants into the UKCS, and consult further with industry in 2015.
And finally, one of the key things we have done as a government is set out three long-term guiding principles for oil and gas tax policy. Simple, but effective in helping us get this relationship with government and industry right.
First of all, the overall tax burden will need to fall as the basin matures.
Yesterday, at the Autumn Statement, the Chancellor announced a headline cut in the rate of the Supplementary Charge from 32% to 30%, effective from 1st January 2015.
Our long term ambition is to reduce the Supplementary Charge rate further as soon as we can afford it. Secondly, we recognise that we have to treat the North Sea as an important economic asset. A job creator, a vital energy source, and a world-class supply chain.
Thirdly, that the competitiveness of the basin will be at the heart of how government judges fiscal policy in future.
The Treasury will work with HMRC and the OGA to review commercial conditions on a regular basis.
We will seek the views of industry on the competitiveness of the basin before making any changes to its plans for rates.
And I can confirm that this approach will replace the price-based trigger point set by the Fair Fuel Stabiliser, which has been in place since Budget 2011 and which we abolished yesterday.
This will provide a much fairer way to judge fiscal policy in future.
Together, these principles mark a fundamental shift in the government’s approach.
And alongside this, industry needs to play its part too. As you recognise, there is work to be done improving your production operations, your cost efficiency and wider commercial practices. A bit like me and Danny here today, we need to work hand in hand.
The OGA will monitor and report on your progress in these areas to build this tripartite approach. With the Treasury, OGA and industry working together, that will enable us to maximise economic recovery. In 2015 there will be lots more to work on, and in meetings later today, I’m keen to discuss how we can collaborate most effectively over the coming months.
I am very optimistic that we can reach a positive outcome for the industry, for the supply chain, for those whose jobs depend on this sector, and for the nation as a whole. And I look forward to working together to secure a positive future for the UK Continental Shelf.
Over to you, Danny.
Read Danny Alexander’s speech to Oil and Gas UK.