At the launch of Oil & Gas UK’s Economic Report, published today (September 9, 2015), Deirdre Michie, Oil & Gas UK's chief executive, spoke to an audience of over 300 business leaders in Aberdeen, at a sold-out event sponsored by Petrotechnics, during Offshore Europe. Deirdre Michie’s full speech is copied below.
At the event, Deirdre noted that while difficult decisions continue to have to be made, a corner is being turned and companies' efforts to become more efficient and competitive are paying off. She added that if the oil price continues to be lower for longer, we will need to work with Treasury to see what other measures may be required, including revisiting the current headline tax rate.
Deirdre Michie’s, CEO Oil & Gas UK, said:
“Good morning and welcome Lord Provost, Provost, ladies and gentlemen.
I am delighted to see so many of you here at the launch of our annual Economic Report, at what continues to be a very challenging time for the industry.
On the face of it, we’ve seen four successive years of record investment - but the returns from that investment have been severely undermined by acute cost inflation.
Last year, we spent more on our UK offshore oil and gas operations than was earned from produc-tion, a situation which has been exacerbated by the sharp and enduring fall in commodity prices.
You’ll hear more about how we got here from my colleague Adam Davey, one of the principal authors of the Report - but here today, we are all too well aware that this situation is unsustainable and that investors are hard pressed to commit to fresh activity here.
And that is a deeply worrying place for us to be in.
But I'm pleased to say that our Report does deliver good news too.
Well before the oil price drop, the industry knew that it needed to take action to restore competitiveness. The efforts made over the past 18 months are now starting to have an impact, without - I must add - the industry losing its focus on maintaining safe production.
We went out to our members over the summer for fresh data. And as you’ll hear shortly from Adam, while difficult decisions continue to have to be made, a corner is being turned.
Production efficiency offshore is improving.
Oil and gas production is expected to lift this year – for the first time in 15 years.
And costs are anticipated to come down significantly by the end of next year.
The challenging environment is forcing businesses to leave no stone unturned in their focus on efficiency improvements and competitiveness. And, as I said earlier, these efforts are paying off.
The market is also adapting, with companies combining - like Halliburton and Baker Hughes, Shell and BG Group, and Schlumberger and Cameron.
And infrastructure, critical to the sustainable future of this industry, is being acquired by firms focused on providing that service – Antin Infrastructure Partners’ acquisition of the Central Area Transmission System, Total’s disposal of its interest in the Frigg pipeline and North Sea Midstream’s acquisition of the Shetland Island Regional Gas Export System.
A new business model is emerging in the UKCS, one that is shaping up to tackle the unique challenges a mature basin like ours faces in a cost competitive environment.
But above and beyond these activities, transformational change is also beginning to emerge - in the shape of evolving business processes, and a push for different culture and behaviours.
And this dynamic is being strengthened by pan-industry efforts determined to take this industry forward.
Just last week, we sought to sharpen the focus on transformational change by launching the work of the Efficiency Task Force, led by John Pearson of Amec Foster Wheeler who is here with us today and from whom you will hear later.
We have also been encouraged by the swift action of the new regulator, the Oil and Gas Authority, and welcomed the update on its progress earlier this week.
But what else is needed alongside continued commitment from the industry and regulator?
Well, two areas for further action spring to mind – tax and support for regional development.
We’ve already seen the Government restructuring the tax regime to provide a more fiscally competitive proposition as well as funding seismic surveys to open up new areas for exploration. We are confident that the Treasury understands the challenges we face and we very much welcomed their efforts.
But since the Budget, the oil price has of course declined further, and we must continue to do as much as we can to help boost confidence and encourage investment in the UKCS.
Therefore it is really important that legislation is now completed to expand the scope of the Investment Allowance as previously advised by Treasury.
The consultations on the remaining fiscal barriers to exploration, infrastructure and decommissioning need to proceed with some urgency and I’m pleased that we will be getting an update on this from HMT very soon.
I think it is fair to say however, that if the oil price continues to be lower for longer, we will need to work with Treasury to see what other measures may be required, including for example revisiting the current headline tax rate, which would be consistent with the government’s fiscal strategy of tax rate falling over time.
The second area of focus is for local authority support. As the UK industry moves towards becoming sustainable in a world of lower oil prices, the support shown to the industry by Treasury and the OGA must also be mirrored at regional level.
Recognising the oil and gas sector as an important creator of local jobs and wealth, local authorities need to nurture and retain local firms - by investing in the infrastructure that will attract and retain companies and their employees in their communities.
That is why we at Oil & Gas UK are pleased to support the Aberdeenshire and Aberdeen City Coun-cil’s bid for City Deal status, which could bring £2.9 billion to the region over 20 years.
Major infrastructure improvements are much needed - anyone caught up in traffic this morning en route to the AECC will agree - and in my view, could be a game-changer in helping to keep the supply chain successful anchored here in the North East and thriving well into the future.
And so today our economic report will reinforce that our industry does have a positive future albeit with challenges that we can rise to.
Over 43 billion boe have been produced to date from the UKCS. Almost half again remains to be extracted. Maximising the recovery of our oil and gas resource will continue to strengthen the country’s energy security, boost tax revenues, exports and the balance of payments, as well as sustain high value activity and jobs in our world-class supply chain.
But to get there will require a major reset in the industry’s collective thinking and approach.
Everyone has a part to play in the transformation that’s needed. This industry is embracing change and taking bold and purposeful action to emerge leaner, fitter and with a competitive and efficient cost base that will ensure a positive and sustainable future.”
The annual report, published by the UK oil and gas industry’s leading trade association, finds that the sector has been particularly challenged by the drop in commodity prices due to production decline and the sharply rising cost base, but that concerted action by the industry to improve efficiency across the sector is leading to an estimated 22 per cent - over £2 billion - reduction in the cost of operating existing assets by the end of 2016.
For further information, please contact Helen Jackson at hjackson@oilandgasuk.co.uk or Sally Hatch at shatch@oilandgasuk.co.uk.