WIREDGOV

FM: UK Government fails on exploration.

Around 40 per cent of production in the North Sea is expected to come from new field developments by 2018, prompting the First Minister to renew calls for swift action by the UK Government, during a Scottish Cabinet visit to Aberdeen today (Monday February 16).

First Minister Nicola Sturgeon said that the UK Government has failed to properly encourage new exploration in the North Sea and this underlines the importance of taking action now.

The introduction of an exploration tax credit has had a significant effect in Norway, resulting in a substantial increase in exploration activity by existing companies and encouraging new entrants. Exploration drilling was in gradual decline in Norway before 2005. However, following the introduction of the exploration tax credit, the number of exploration wells increased fourfold over the successive 3 years.

In January, the Scottish Government published Oil and Gas Discussion Paper - Challenges, Opportunities, and Future Policy which set out clear proposals for fiscal change, including a call for the introduction of an exploration tax credit by the March 2015 Budget. The Scottish Government has called for the UK Government to:

• Introduce an exploration tax credit
• Reduce the headline rate of tax in the North Sea
• Introduce an investment allowance

The Scottish Government and industry leaders believe the fiscal regime is the single largest barrier holding back exploration activity. The introduction of an exploration tax credit has the potential to substantially boost exploration activity. It would also providing support to those small and medium sized companies who currently cannot access tax relief on exploration expenditure.

While in Aberdeen, the First Minister and Deputy First Minister visited Pipelines 2 Data, an Aberdeen-based pipeline support service provider which has worked with several major oil and gas pipeline operators and related industry service providers.

Speaking from the company premises, the First Minister said:

“I believe that North Sea oil is a fantastic asset for Scotland and will continue to be so be for decades to come. There are up to 24 billion barrels of oil and gas equivalent remaining, and it is essential that we have a stable and proportionate fiscal regime which encourages the investment, innovation and exploration required.

“But we need action now from the UK Government to help ensure we maximise future production and economic recovery. Quite frankly, the UK Government has failed to address the exploration problem in the North Sea.

“It cannot be clearer that urgent fiscal stimulus is required to improve the exploration outlook. Around 40% of production is expected to come from new field developments by 2018: that’s only three years away. Fiscal measures to incentivise exploration, coupled with the appropriate regulatory expertise, have the potential to drive forward a resurgence in exploration in the North Sea.

“We only have to look at the situation in Norway in 2005 to see that simple steps can be taken to restore a decline in exploration. In the course of three years, the introduction of the exploration tax credit saw the number of exploration wells increase an incredible fourfold.

“We have also called for the reduction in the headline rate of tax in the North Sea and the introduction of an investment allowance, all of which have the potential to provide an important signal to investors, increase the attractiveness of North Sea exploration projects and enhance the competitiveness of the sector.

“The UK Government cannot continue to ignore calls from the Scottish Government and the industry themselves. Sir Ian Wood has recently stated that up to six billion barrels of oil reserves could be lost unless radical measures are taken by the UK Government. We will continue to call on the UK Government to maintain the momentum for fiscal and regulatory change in the oil and gas sector, both of which are critical to prolonging the life of the industry beyond 2050 and maximising the total value generated in the economy.”

Notes To Editors

In 2013, Oil and Gas UK reported that around 25 per cent of exploration wells were drilled by small to medium sized companies. The tax arrangements currently in place do not provide support to these companies if they are not yet in a tax-paying position, putting them at a significant disadvantage. The exploration tax credit is primarily designed to equalise the tax relief provided to companies in a tax paying and non-tax paying position.

At the Oil and Gas Summit on 2 Feb 2015, Malcolm Webb, chief executive of Oil & Gas UK, said: "We're in a dreadful position on exploration wells at the moment. I mean, how many are we going to drill this year? Eight? Ten? I don't think it's going to be 15.”

At the Oil and Gas Summit earlier this month Alex Kemp, professor of petroleum economics at the University of Aberdeen, said:

"The case for an exploration tax credit now that we are at 50 US dollars rather than 100 is clearly now much stronger, because smaller companies will have difficulty raising finance and they are often the explorers. When I talk to our Norwegian counterparts there is an unanimity that the refundable tax credit has increased exploration substantially, and more importantly has increased the number of discoveries - some of which are commercial.”

In recent years Norway has seen major discoveries such as Johan Sverdrup field and the Johan Castberg field, and in 2014 Norway achieved a five year high in the number of exploration wells drilled and ranked 4th globally in terms of the volume of newly discovered reserves.