Oil and gas UK: New era, new challenges

Source: Technology Digital

Date :28/08/2007 14:43:06

James Hurley interviews Malcom Webb, Chief Executive of Oil & Gas UK, and finds him speaking up for an unsung industry

As a leading representative of a traditionally “misunderstood and maligned” industry, Malcolm Webb brings considerable passion and energy to his role as Chief Executive of Oil & Gas UK, the newly formed representative organisation for the UK offshore industry. He told James Hurley how it is helping the industry meet rampant cost challenges and secure the long-term health of the sector

Written by James Hurley

For Malcolm Webb, the UK offshore oil and gas sector is an unsung hero of British industry. While the sector that he represents – as Chief Executive of pan-industry forum Oil & Gas UK – employs almost 400,000 staff directly in the UK, and a further 100,000 in suppliers and other associated businesses, it’s also the most highly taxed sector in the UK. As the industry faces a period of increasing challenges and uncertainties, Oil & Gas UK is an invaluable and coherent voice for the UK’s mature offshore oil and gas industry.

The voice of an industry

A trained lawyer with over 30 years of experience in the oil and gas industry, Webb became involved in trade associations following a career break, as Director General of the UK Petroleum Industry Association. In 2003, following three years at the helm of the association mostly spent “looking after refinements in the UK,” Webb joined the UK Offshore Operators Association (UKOOA), and in the process was given the opportunity to indulge his true professional passion, which, he says, “has always been the upstream side of the business.”

Oil & Gas UK was formed in April, with Webb as Chief Executive, to replace and ultimately broaden UKOOA’s more limited remit. “Before, the organisation just focused on the oil and gas operators, the oil companies who were running the ventures and were the main investors,” Webb explains. “We have now expanded the membership to embrace the whole of the industry; the whole of the supply chain is now in our membership. I think that puts us in a very interesting position.”

It’s also a consolidated position that is looking increasingly vital as the sector faces mounting cost challenges. “We are faced with rampant cost inflation, which is leading to capital inefficiency. It desperately needs to be tackled – operating costs have risen by some 40 percent over the last two years. We shouldn’t delude ourselves – we’re not going to turn global markets around, and we can’t expect the UK to buck trends of global inflation, but we do think it’s important that all parts of industry acknowledge the challenge that faces us if we’re to keep this industry competitive. I think Oil and Gas UK, embracing the whole of the industry, is much better placed to get a constructive debate on that issue going.”

Advocating fiscal balance

If the cost challenge faced by the industry is a significant one, the UK’s harsh fiscal regime forms an extensive part of this test. “We don’t pay corporation tax at 28 percent; we pay it at 30 percent, because the recent reduction was not given to us. On top of that, we pay 20 percent supplementary corporation tax, introduced in two hikes, starting with ten percent in 2002. And for older fields - those that came into production before 1993 - there’s another fifty percent tax,” says Webb. This petroleum revenue tax (PRT), takes fifty percent of the margin, and effectively means that there’s a marginal tax rate on the oldest fields of 75 percent.

Of course, the international oil and gas industry is traditionally a heavily taxed industry, and the marginal rate is even higher in some parts of the world, including Norway. However, Webb argues that this is a misleading comparison. “The crucial difference is that ours is a mature oil province with declining production and much smaller discovery and development sizes coupled with these very high costs. The challenge of keeping this very mature oil field competitive is quite extreme, and very high tax being levied on top of that certainly doesn’t help. I think the message is, over time, the tax rate has to come down.”

Webb advocates the dissolution of PRT, and subsequent reductions in the rate of supplementary corporation tax. If this doesn’t happen, he believes the UK will begin to see evidence of the principle that, in taxation terms, more can mean less. Indeed, we may already be seeing the beginnings of this process. In his last budget before he became Prime Minister, Gordon Brown complained about a fall in tax revenues from the North Sea. This year, tax revenues are forecast to drop from £11 billion to around £8 billion, as higher taxes, declining production and lower gas prices all take their toll.

“We need to simplify the tax regime, but also reduce the rate going forward, otherwise we will not realise the full potential of the basin. And that potential is quite dramatic. While we are talking about a mature province, there are upwards of 25 billion barrels of oil and gas reserves yet to be recovered from the UK continental shelf – that’s a very big prize to play for. But that further oil and gas is in smaller accumulations than we had before and therefore the exploration and development costs are a huge challenge.”

Uncertainty on the fiscal and regulatory treatment of decommissioning is also hitting the productive future of the basin; decommissioning costs are estimated to be around £15 billion and uncertainty on the future fiscal treatment of these costs is forcing companies to over provide and it makes asset trading much more costly. Webb says that companies should be allowed to make a clean break when assets are sold. “The Petroleum act should be amended and there needs to be an agreement that provides robust financial security for all parties.”

Meeting the UK’s energy demands

Webb believes that the current tax regime is prohibitive to new entrants, and is also putting the squeeze on existing ones, ultimately eroding the competitiveness of an industry that is even more vital to the UK’s future energy mix than many people realise.

In 2006, oil and gas from the UK Continental Shelf (UKCS) provided 70 percent of the nation’s total energy demand, avoiding import costs to the tune of £30 billion. It also provides 96 percent of the UK’s oil needs and 92 percent of its gas. Perhaps most surprisingly of all, despite all the talk of improving the energy mix and reducing our reliance on fossil fuels, by the government’s own forecasts, our reliance on oil and gas is actually set to increase over the next 15 years.

“By 2020, 80 percent of our energy needs will be met by oil and gas. This currently sits at 75 percent. It’s important that we explore all energy sources and the correct investment goes into renewable energy sources, but the fact of the matter is, in the foreseeable future, oil is going to remain the dominant energy source for this country - and it’s increasing in its presence not decreasing. It’s massively important that we increase indigenous production, and it’s also important that we have an industry that can help the globe search for other reserves,” says Webb.

The industry is already beginning to rise to the challenge. “Subsea technology developments will help it meet a number of the maturity tests,” he says. “It allows us to go and exploit remote reservoirs without putting in the expensive infrastructure of the jacket, top sides and huge production platform. We can simply drill the wells, complete them and tie them back to another facility. It’s much cheaper, more environmentally friendly, and real smart technology. With smaller fields in the UK, it’s obviously the future.” Already, 40 percent of production in the North Sea is coming through subsea systems.

Webb believes that subsea is also important as “one of the jewels in the crown” for the UK oil and gas industry. “There’s no question that the UK is the global leader in subsea engineering. Approximately 50 percent of global subsea spend is in the UK. The potential of that industry, both here in the UK, and as an export, is enormous. It’s exciting from the UK production perspective, but also in terms of exporting expertise around the world.”

Last year, the UK supply chain did £11 billion worth of business in UK offshore, and £4 billion in the export of oilfield goods and services. “We looked at the growth of that, and it’s pretty spectacular – an average of ten percent a year for the past five years. If you compare that with what else is going on in British manufacturing, it’s pretty staggering,” Webb enthuses.

“There’s great potential for further growth. For the industry as a whole, the engineering and supply chain service is becoming increasingly important. We will get to the stage where we may find supply chain export turnover equals domestic turnover because the export business is growing so well.”

If Oil & Gas UK is successful in engaging with government to help reduce the cost burden on the industry, its improved competitiveness should leave it well placed for years to come. “If investment is sustained in the UKCS, in 2020 it could still provide around 60 percent of the UK’s oil and 25 percent of its gas. The UK can emerge as a global leader in oil and gas technology, goods and services.”