Reforms urged to oil industry

Radical fiscal and regulatory changes are needed in the oil and gas industry to make sure the remaining resources in the North Sea provide the greatest economic benefits, an expert group has warned.

The Independent Expert Commission on Oil and Gas has called for "fundamental change" to encourage more investment and production because the industry has reached a "critical crossroads".

The commission was set up by the Scottish Government, and tasked with exploring how the total value of the whole industry can be maximised, and how the future for the UK continental shelf (UKCS) can be secured, ahead of the independence referendum.

It has called for a change in "stewardship philosophy" by overhauling the tax and regulatory regimes which are currently in place.

The Government should move towards a tax regime which is "stable, predictable and internationally competitive", it states.

"Lower tax rates with modified allowances could incentivise new developments whilst producing a simpler system."

Chairman Melfort Campbell said: "Within the current regime and climate of declining investment, we are seeing inadequate returns for operators, significantly reduced income for the Treasury and the loss of the added value through the supply chain and into the wider economy.

"The commission concludes that Government must recognise that policy must swiftly change from seeking to control access to a sought-after resource to one where investment has to be attracted by positive features.

"In other words, the UKCS used to be like an exclusive nightclub with bouncers on the door only allowing celebrity VIPs access. Now, it is more akin to a trattoria with waiters touting for business on the pavement outside."

The commission has backed calls from retired oil tycoon Sir Ian Wood to set up a new regulator to oversee the industry.

Mr Campbell added: "The Wood Review, with the creation of a new regulator, provides the means for creating the opportunity but we can only make the most of that opportunity if we focus on total value added."

Commmenting on the findings, Energy Minister Fergus Ewing said: "The Scottish Government agrees with the commission that a fundamental shift in the way oil and gas policy is formulated is long overdue, and that basing policy on Total Value Added (TVA) is central to fulfilling the North Sea's potential.

"I am pleased that the commission fully back the proposal from Sir Ian Wood for the creation of an arm's length regulator that will enhance the stewardship of our natural resources. And since the vast majority of future oil and gas activity will be in Scottish waters, the commission has determined that the new regulator should predominantly be within the control of the Scottish Government in an Independent Scotland.

"The UK Government, unlike our counterparts in Norway, has repeatedly missed the point - formulating policy based on short-term gain instead of focusing on long-term impact and the need to sustain investment in all areas of the oil and gas industry.

"The commission's report builds on Sir Ian's findings by considering the fiscal regime, and we have been very clear that under independence, there will be no changes to the fiscal regime without prior consultation with industry."

He added: "This report provides an invaluable framework within which oil and gas policy can evolve. We will take time to consider it in detail, and I look forward to engaging with industry on its findings."

Oil & Gas UK's chief executive, Malcolm Webb, said: "This report is a constructive and intelligent addition to the knowledge base concerning our industry's contribution to the UK economy - not only in terms of oil and gas production, but also through the support of some half a million jobs though a thriving supply chain, active in both the domestic and export markets.

"The commission's emphasis on the need for informed collaboration both north and south of the border in order to realise the full potential of the UKCS, echoes a widely-held sentiment across our industry."

The organisation's economic and commercial director, Mike Tholen, said: "Today's report offers a timely reminder of the need to simplify the fiscal regime and lighten the burden to encourage more investment in the North Sea.

"We look forward to exploring in more detail the possibilities which the report's recommendations raise. We believe that there are up to 24 billion barrels of oil equivalent remain to be produced throughout the UKCS, the recovery of which will depend largely upon having the right fiscal regime in place."

Better Together leader Alistair Darling said: "Although production of North Sea oil has fallen over the last 10 years, there is still a lot of oil going to be extracted with the right tax regime in place.

"It is the strength of the UK that allows us to give more tax breaks for start-up costs and more importantly the massive decommissioning costs which will run to more than £30 billion over the next few years.

"With a much smaller economy those costs will be difficult to bear, especially if you are so dependent on volatile oil revenues."

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