Oil and gas 'exploration-friendly climate' desperately needed, says expert

Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that despite some positive findings, the latest industry report from Oil and Gas UK showed an urgent need to "create the right climate for companies to invest" in the UK Continental Shelf (UKCS).

"While it is encouraging to see production up and operating costs down in 2015, there is an urgent need to secure investment in drilling," Ruddiman said.

Oil and Gas UK called on the government to "vigorously champion the UK's oil and gas industry", with a particular focus on decommissioning and trading assets towards the end of their working life.

"The evidence in the report demonstrates what our industry can achieve when the basin's competitiveness is addressed and the tax regime reformed," said Deirdre Michie, Oil and Gas UK's chief executive.

"Now it is time for the UK and Scottish governments to reinforce their efforts to promote the UKCS, nationally and internationally, as an attractive investment with world-leading capability from front-end exploration to late-life operations," she said.

The equivalent of more than 43 billion barrels of oil (boe) has been recovered from the UKCS since production began in 1967, and Oil and Gas UK has estimated that between 10 and 20bn boe remains to be discovered. However, the UK oil and gas industry is currently producing at four times the rate it is discovering new reserves, something which Oil and Gas UK described in its report as "unsustainable".

"Encouraging all forms of drilling, including development, over the next 12 to 18 months will be vital for the industry's future," it said in its report. "We must also begin to tap into the opportunities offered by the undeveloped small pools that have remained on the shelf for many years."

The report sets out three priorities for the industry ahead of this year's Autumn Statement, which is due to take place on 23 November. These are obtaining the new government's commitment to the 'Driving Investment' programme of oil and gas tax reform; certainty over decommissioning tax relief; and explicitly incorporating the oil and gas supply chain within the UK's new industrial strategy.

On decommissioning relief in particular, Oil and Gas UK has highlighted the "asymmetric availability" of decommissioning tax relief when 'mature' assets are sold to new owners. As the buyer is less likely to have accumulated much tax history at the point of purchase, there is a risk that the asset's profitability is not high enough to offset the final decommissioning tax liability, according to its report.

"Fixing this issue would represent a significant improvement to the fiscal terms available on the UKCS and would make it much easier for new investors to enter the market," Oil and Gas UK said in its report.

The government should also look at options for improving access to finance for potential investors, it said.

UKCS production rose by 10.4% in 2015, the first increase in 15 years, according to the report. The average cost of extracting a barrel of oil or gas fell by 45% over the same period due to increased efficiencies, Oil and Gas UK said.

The UK's recent decision to leave the EU added "an additional dimension of complexity" to current trading challenges, Oil and Gas UK said. The body expected three main challenges as a result of Brexit: the distraction from managing its way through the downturn; the loss of positive influence over EU policy developments; and market uncertainty weighing against longer-term investment decisions; it said.

"In addition, the ability to access the EU market for our goods and services could become more difficult, unless appropriate provisions are made to facilitate ongoing trade and maintain access to the energy market," it said in its report.