SmallCapNews | Oil industry calls for future tax changes to stimulate North Sea economics

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Oil industry calls for future tax changes to stimulate North Sea economics

11 November 2009

Malcolm Webb, the chief executive of the oil industry body Oil & Gas UK, has called on the Government to cut tax rates in order stimulate exploration and production activity in the North Sea.

Mr Webb acknowledged that while it was unrealistic to expect a tax reduction in the current economic climate, future action was essential if the UK was going to retain all the advantages of a burgeoning subsea industry.

His comments came as representatives of the UK’s subsea engineering sector said that its member firms had the potential to play a major role in tapping the remaining oil reserves under the North Sea. However, they are worried that waning confidence in the market combined with project delays and depressed conditions in the US, could be leaving many companies over-exposed.

According to oil and gas consultancy Hannon Westwood, there are something like 27 billion barrels of oil remaining under the North Sea. However, there is increasing speculation across the industry as to how those reserves can be produced effectively.

Subsea developments offer a way to bring onstream new oil and gas reserves in a cheaper and more environmentally-friendly way than building a platform because they involve tying back to existing infrastructure. Subsea UK represents over 200 companies from the sector which currently employs 40,000 people in the UK with revenues of around £5 billion a year.

Alistair Birnie, Subsea UK's chief executive, said: “Given the efforts to bring down costs in a mature basin such as the UK Continental Shelf (UKCS), subsea developments are critical to sustaining production here and increasingly around the world. Indeed, 43% of UK production is now accounted for by subsea wells and subsea goods and services are exported to the value of £2 billion per year.”

However, Mr Birnie said he was concerned that despite a backlog of work that had buoyed the sector through much of the economic downturn, continuing delays on projects, a direct result of the downturn, and the impact of the North American slowdown were now hitting the sector hard.

He said: “While tendering activity is higher, there is growing evidence of pressure on prices. There is potential for further day rate erosion in drilling, reductions in revenues and margins and subsequently employment across the sector.”

Despite the problems, Mr Birnie did note that many firms that had started to offer value-adding services had continued to do well. In turn, those with a spread of work across the globe rather than just in the UK have maintained their position.

Mr Webb added that the UK was now considered a world leader in subsea engineering but that without additional support from the UK Government and a focus on efficiency and cost control by the industry itself, there was a risk that many firms could be enticed away from the country.

“The rooting of this high-performing industry in the UK is not guaranteed,” he said. “If we are to anchor the subsea industry in this country and reap the rewards in terms of employment, exports and technology development for decades to come, we must ensure that the domestic activity is sustained.”