Meeting of the Parliament 10 March 2015
The general issue of cost reduction is primarily the responsibility of the industry. It is the industry that devises how projects are managed, how they are specified and how they are delivered. The industry would be the first to agree that that is its responsibility. I know because representatives have told me so in many meetings. We all have a responsibility to ensure that the framework within which the industry operates is correct and that health and safety interests are paramount. I know that Lewis Macdonald and others have argued that case.
For the same reasons, it is also important that, in pursuing cost reductions, industry operators listen carefully to the views and experience of the people in the supply chain, who are often best placed to advise on how costs can be reduced. It can be done by agreeing simpler specifications, by standardisation of parts and processes and through take-up of technical deployment and innovation. Operators, contractors and the supply chain need to work more collaboratively. That is the very clear feedback that I have received from the industry.
The North Sea must be seen as an attractive place to do business, and it is clear that the pace of progress on fiscal reform has been too slow. We have consistently called for a transparent, predictable and competitive fiscal regime. In 2011, we published proposals that included the introduction of an investment allowance to mitigate the chancellor’s tax grab when he raised the supplementary charge from 20 per cent to 32 per cent.
In 2013 we published “Maximising the Returns for Oil and Gas in an Independent Scotland”, setting out the approach that we would take to stewardship. Following the publication of Sir Ian Wood’s interim report in 2013 and the final report in the summer of 2014, we made clear our full support. We agreed with him then when he said that
“clear views were expressed that fiscal instability has been a significant factor in basin under-performance”
and we agreed with him last month when he said that
“6 billion barrels of oil reserved could be lost unless radical measures are taken by the UK Government.”
In January, we published an oil and gas discussion paper that set out the fiscal measures that we believe are necessary and, in responding to the consultation on an investment allowance, we set out how a well-designed investment allowance could address many of the underlying challenges that exist in the North Sea.
Given the stark outlook that is highlighted by the industry’s latest activity survey, I want to outline our proposals for urgent and substantive tax reform in the budget. First, the UK Government must reverse the misguided supplementary charge increase from 2011. That will provide a strong signal to investors that the North Sea is open for business. Secondly, we are calling for a basin-wide investment allowance with a single rate of 62.5 per cent. That will simplify the fiscal regime and boost investment. Thirdly, we are calling for an exploration tax credit. Failure on the part of the UK Government to introduce sufficiently strong measures to address the dearth of exploration would be a serious error.
Although it is essential that the chancellor use his budget next week to introduce those fiscal reforms with immediate effect, the Scottish Government is clear that that is only part of a longer-term process of reform, which must involve action on regulation. The UK Government must maintain momentum on regulatory reform. We welcomed the announcement of the Oil and Gas Authority and the appointment of Andy Samuel as chief executive. On 25 February, Andy Samuel published his “Call to Action: The Oil and Gas Authority Commission 2015” , which set out the two most immediate risks. The first is the risk that the profitability of producing fields will not be sufficient to attract continued investment, which could lead to premature decommissioning of assets, and the second is that confidence in the potential of the UKCS will continue to decline, which would result in critical long-term investment not being committed.
The potential risks simply cannot be overstated and inaction is not a rational option. Two things are imperative. First, the UK Government must ensure that the Oil and Gas Authority is consulted on all fiscal policy. Secondly, it is essential that the Oil and Gas Authority has the resources and people in place now to take forward the action that is needed to mitigate the risks. It must have sufficient people to do so.
I want to talk about action by the Scottish Government. As I have outlined, it is clear that both fiscal and regulatory reform must be instituted now. I want to assure Parliament that the Scottish Government is continuing to make best use of our devolved powers, and I am committed to examining any further ways in which we could do more.
I want to summarise some of the measures that the Government has taken. We have supported the skills needs for the sector through our energy skills investment plan and the creation of Energy Skills Scotland. We have also established the energy jobs task force. I am encouraged by the commitment and collaboration that all the members of the task force have shown. That commitment has seen the establishment of a website to help match individuals with employers—I believe that that suggestion came from one of the industry leaders on the task force. In addition, a large-scale partnership action for continuing employment event is to be held in Aberdeen this month, which will be targeted at individuals in the sector who face redundancy.