'New vision' urged for oil industry

The North Sea oil and gas industry needs to “significantly” reduce costs by billions of pounds to remain competitive, a report has warned.

Professional services firm PwC said “a new vision and new ways of working are urgently required” for the sector.

It argued it is “essential” that companies operating in the North Sea work together and collaborate, stating that this would help the industry to ” plan more effectively and further into the future”.

It also urged the industry to grasp the “rich source of opportunity” that decommissioning offers, saying this could be worth about £35 billion.

Meanwhile the UK Government needs to provide “strategic clarity” on taxation, with PwC’s latest Northern Lights report warning a “lack of fiscal stability” risks damaging business.

Kevin Reynard, PwC’s office senior partner in Aberdeen, said: ” We believe the North Sea has a huge future, but there is much work still to be done to secure this value and cement its position as a global oil and gas hub.

“It’s vital that we take a more strategic and integrated view to help extend the life of the North Sea – for everyone involved and for future generations. If we choose not to change, then we risk sleep-walking into an early sunset. It’s time to get started if we want to secure a vibrant UK North Sea for the next 40 years.”

The report calls for a broad strategic framework to be developed for the industry to ” create certainty under the auspices of a new independent regulator”, as proposed by Sir Ian Wood’s review of the oil and gas sector.

PwC stressed: “A new vision and new ways of working are urgently required. We believe that, for the UK North Sea to remain competitive, we need to reduce costs significantly – billions of pounds of costs – as well as increase production efficiency. To achieve this, we must engage, collaborate and build trust as an industry.”

Increasing costs were said to be a ” defining feature of the UK North Sea”, with the report warning these are “likely to rise still further” as firms try to extract the remaining oil and gas reserves.

But PwC said: ” We believe that by adopting collaborative working practices and working with a ‘one business’ mind-set, the UK North Sea supply chain can develop sustainable long-term strategies for competitive advantage. There has never been a more urgent need to do so.”

Supply chain costs could be reduced by up to 10%, boosting profitability by as much as £3 billion, according to the report.

It also said the decommissioning could ” turn a potential loss of £35 billion into a new business model of opportunity that has yet to be fully exploited”.

PwC published its first Northern Lights report on the sector in 2011, and it said that since then the fiscal regime for both exploration and production activities had “changed significantly”.

While the report said much of this change was “for the better”, it added: “T here is still a proliferation of new tax costs, several of which have arisen unexpectedly. We believe that government urgently needs to provide strategic clarity in this area so the industry can plan ahead. A lack of fiscal stability at this defining moment in the UK North Sea life has the potential to seriously damage business prospects within the sector.”

Mr Reynard said the future outlook for North Sea oil and gas ” could be so much brighter”.

He stated: “With UK taxpayers effectively footing the bill for half the costs of any decommissioning activity in UK waters, forecast to be worth around £35 billion, is it not in our best interests to harness our own expertise and grab the opportunity ourselves? If we don’t act fast, the risk is that overseas companies will raid the UK’s revenue base, setting themselves up as the ‘go to’ global experts.”

He continued: ” The Wood Review recommendations, particularly in relation to a strategic framework and creation of a tough industry regulator, will go some way to creating certainty and a common strategic direction for North Sea operators.

“But it can’t operate in isolation. It’s vital the industry – and other stakeholders such as the public sector – get on board and commit to this vision of the future.”

The Scottish Government welcomed the report, with a spokeswoman stating it ” confirms both the huge potential for Scotland’s oil and gas industry and also our previously stated view that decommissioning the North Sea’s oil and gas infrastructure represents a rich source of opportunity”.

She said: “More than £35 billion is expected to be spent on decommissioning over the period to 2040. This presents a major opportunity – if we grab it – to secure and create thousands of jobs for the people and economy of Scotland.

“With Scottish oil and gas companies already enjoying a well-deserved world class reputation, operating in over 100 countries and achieving international sales of £8.2 billion in 2011, Scotland is ideally placed to develop infrastructure and capability for successful decommissioning which can then help Scottish companies maximise business opportunities in other key areas, including the Gulf of Mexico, west of Africa and the South China Sea.

“We also note PwC’s comments on the proliferation of new and unexpected tax costs, further confirming that the UK Government’s decision to bring in an ‘oil exploration tax’ in the latest budget was a mistake – and potentially a costly mistake for both the industry and the exchequer. The UK Government’s implementation of Bareboat Charter Tax regime will hit industry hard at a time of increased production costs. It should be scrapped. The risk is that even if one major development does not proceed as a result of the UK imposing this extra tax, it will mean net losses through the loss of tax revenue from such new fields.”

A spokeswoman for the UK Department of Energy and Climate Change said: ” We have set out a clear plan which will help get the best of the North Sea oil and gas reserves.

“We are fast tracking the recommendations in Sir Ian Wood’s report, helping industry and government work together to recover as much oil and gas as possible while pumping £200bn into the economy.

“In his budget, the Chancellor announced that the Government will review the fiscal regime for the for the UK Continental Shelf to ensure it continues to incentivise economic recovery as the basin matures, working with the new oil and gas arm’s length body.”

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'New vision' urged for oil industry