Oil and gas contractors could continue to enjoy a long-term future in the UK North Sea, if the right conditions are created for further exploration and investment through tax breaks and cost restructuring.
This is one conclusion of Oil & Gas UK’s Activity Survey 2015, which also highlights that if action is not taken, contractors should start looking for contract opportunities in other oil and gas provinces as the market for their services will shrink.
“This year’s Activity Survey paints a bleak picture but also identifies this region’s potential, emphasising the importance of government and industry now putting the right measures in place to secure its long-term future,” notes Oil & Gas UK chief executive Malcolm Webb.
North Sea investment required to secure contracts and jobs
Webb continues: “This is crucial not only for the energy security that domestic oil and gas production provides but also for the hundreds of thousands of highly skilled jobs, advanced technology and billions of pounds of exports which the industry underpins.
“Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground.”
The report shows that exploration, which is what ultimately generates upstream, midstream and eventually downstream contracts for oil and gas contractors throughout the oil and gas supply chain, has slowed to only 14 wells drilled in 2014out of the expected 25.
Oil and gas contractor prospects depend on the Chancellor’s 2015 Budget
Webb warns that, unless the tax burden and costs are tackled, the long-term viability of the UK Continental Shelf (UKCS) is threatened: “Even at $110 per barrel, the ability of the industry to realise the full potential of the UK’s oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation. At current oil prices, we now see the consequences only too clearly.”
A new tax break for North Sea producers is anticipated in the 2015 Budget in March 2015 that will make continued investment in exploration and production more attractive for oil and gas contractor clients.
The report confirms that: “A commitment to implement an Investment Allowance was given in the Autumn Statement and industry is working closely with government to deliver the Allowance at Budget 2015.”
“Tax breaks will boost the oil industry” - IPSE
The Association of Independent Professionals and the Self Employed (IPSE) director of policy and external affairs Simon McVicker believes that tax breaks will have a major positive impact on oil and gas contractor prospects.
“The Chancellor’s plans to offer tax breaks for North Sea producers will go a long way to boost a hugely important industry which is dominated by contractors,” he says. “The recent fall in oil prices has meant contactors working in this sector have been hit the hardest, suffering rate cuts, reduced hours and terminated contracts on a weekly basis.
“The desperately needed tax break proposals will hopefully help to boost investment for the industry and strengthen the UK’s economic growth as a result. Independent professionals have a huge part to play in enabling economic growth and any initiative which removes red tape or reduces the tax burden on businesses is to be welcomed.”
What action can oil and gas contractors take to safeguard their futures?
Although there are positive signs that action will be taken to safeguard the UK’s oil and gas sector, oil and gas contractors should not be complacent. This is despite the fact that the day rates for some contractors who have hard to source skills remain competitive.
The UK is an acknowledged world leader in many technology and skills areas. Those skills gained through working in the North Sea’s tough offshore operating environment are highly sought after in other oil and gas provinces, particularly in subsea engineering and production.
UK-based oil and gas contractors seeking to maintain or even increase their rates will find that, apart from some commoditised and support areas, their skills remain very much in demand outside of the UK and Europe.
Web concludes: “This offshore oil and gas industry is a major national asset. Our indigenous resources hold the promise of a successful industry for decades to come and we have the skills needed to realise that potential. The industry is taking measures to improve its cost efficiency and we are pleased that even before the steep fall in oil price, the government took the important steps of…conducting a comprehensive tax review.“The time has now come for delivery of permanent change on those fronts. We need to see…a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline.”