The latest Oil & Gas UK Activity Survey provides a reminder of the significant challenges facing the industry at this time. However, it also highlights the resilience of the industry and its workforce, which has improved efficiency and over the last year has reduced unit operating costs by around a third. Improvements in production efficiency have also led to an overall increase in annual production for the first time in 15 years.
The report also outlines the challenges ahead in a lower oil price world – with lower levels of capital investment and a lack of exploration activity likely to pose challenges for future production.
These are concerns fully understood by the Scottish Government, and we have taken bold action through our devolved powers to help the industry where we can.
The UK Government, however, retains the key economic levers affecting the sector, which is why the Deputy First Minister wrote to the Chancellor of the Exchequer earlier this month to outline the Scottish Government’s position on the need for further support.
The ability to access affordable finance during the downturn is vital for both operating and supply chain companies. It is becoming apparent that the constraints on expenditure may be resulting in liquidity constraints across the sector, which is likely to exacerbate the current downturn.
The UK Government has the power to take action to facilitate access to finance – for both operators and the supply chain – through the introduction of a Government loan guarantee scheme. This scheme would improve access to working capital, ease borrowing constraints and may provide a crucial lifeline to many companies. This would also help with efforts to sustain critical infrastructure in the North Sea. The Deputy First Minister has called on the Chancellor to consider this type of support – potentially facilitated by the Infrastructure UK Loan Guarantee Scheme – ahead of the UK Government’s Budget next month.
This short-term support for the industry should be complemented by further long-term action in order to ensure that we maintain a globally competitive industry. The Scottish Government has repeatedly called for oil and gas fiscal policy to be supportive during this challenging time, and has called for a substantial reduction in the headline rate of tax, removal of fiscal barriers to exploration and enhanced oil recovery, and improved access to decommissioning tax relief reforms to encourage late life asset transfer to help prevent the premature cessation of production from viable fields.
It is critical that the UK Government's tax policies are not a barrier to activity and investment. Policy should be reformed to ensure that projects which are commercially acceptable before tax remain commercially acceptable after tax.
The North Sea still holds significant potential. With industry estimates of up to 20 billion barrels of oil equivalent still to be recovered, Scotland can remain a global oil and gas hub with a strong international reputation.
That is why the Scottish Government, in addition, has been doing all that we can within our devolved powers to support the industry.
An excellent example is the Energy Jobs Taskforce, established by the First Minister last January. The taskforce is chaired by Dr Lena Wilson, chief executive of Scottish Enterprise, and it has achieved a great deal since its inception. However, the job losses within the industry continue to remain a concern and the focus of the taskforce has been to reach and support those at risk of redundancy. The taskforce is making a concerted effort to ensure that everything possible is being done to retain the talent and skills within the industry. We also launched an enhanced Adopt an Apprentice scheme last February, which enables firms to re-employ any modern apprentice in the industry who faces redundancy.
The First Minister recently asked the taskforce to continue its work to support individuals and companies in the sector. As well as the Energy Jobs Taskforce, the First Minister recently announced a further support package of £24.5 million. This includes £12 million for a new Transition Training Fund, which will help maintain the highly skilled energy workforce in the North Sea region by offering grants to individuals to support their redeployment through retraining or further education. A further £12.5 million has been allocated by Scottish Enterprise for increased innovation and business support measures.
Additionally, Scottish Enterprise has begun an extensive research project to analyse and understand the extent of gaps in the availability of finance for the oil and gas sector.
We also recognise the critical importance of Aberdeen and the North East – areas that will be central to driving future growth and prosperity in Scotland. That is why we are investing £125 million through a City Deal agreement with the UK Government and Aberdeen City and Aberdeenshire Councils, and are providing a further £254 million of additional investment from the Scottish Government to help cement Aberdeen as one of the world’s leading cities for investment and business.
This significant investment illustrates the Scottish Government’s belief in the future of the oil & gas industry, but in order to secure a viable and sustainable future, even more needs to be done.