OIL: Open letter to Chancellor

Our Government is currently taking no action to prevent the demise of the North Sea engineering sector, which was once the largest area of industrial investment in the UK.

I am sure you don’t intend to allow this to happen on your watch and, as Chairman of OGN, I feel compelled to make the case for UK manufacturing, jobs and prosperity.

An estimated 30,000 jobs have been lost in the UK oil and gas sector in the last six months. OGN has been forced to shed 2,500 jobs in the past three months.

This has been a huge blow to the local economy in the North East and disastrous news for our apprentices. If we can’t train our young people today, there is no hope for North Sea engineering tomorrow.

I have brought this situation to the attention of Government ministers and their officials over the past two years.

Their lack of a tangible response has been very disappointing. I was particularly disheartened that neither your recent spending review, nor Amber Rudd’s energy policy statement, specifically addressed the plight of the offshore manufacturing sector and the consequences of low oil prices.

I have spoken to Amber Rudd about the situation and, at the last party conference business day, I talked to both David Gauke and Andrea Leadsom about my concerns. Andrea promised me a meeting and I am still hopeful that a date may be offered.

No doubt falling tax receipts from the oil and gas sector are of great concern to you, as is a future in which the UK may become increasingly dependent on oil and gas imports.

Yet the North Sea still has significant resources and plenty of new opportunities for operators.

I recently attended a presentation by the Apache Corporation, one of the very few major players that is still investing in the North Sea and is talking optimistically about the future of the UKCS. Your recent changes to the tax regime are having a positive impact on Apache’s operations. Precisely the outcome that you were seeking and it was most heartening, but notable because it is a rare positive voice in an otherwise pessimistic environment.

There is now a very real danger that operators will desert the UKCS for more favourable exploration and production climates.

If we allow our oil and gas producing fields to be shut down, it will be almost impossible to reopen them.

The simple fact is that investment in the North Sea, with oil at $45/50 dollars a barrel, is not economically viable for most operators.

We are no longer competitive. Unless we can improve the long-term investment potential of the North Sea, capital will continue to migrate to other locations.

It is already happening. Most of the smaller players are struggling to survive and cannot contemplate further investment.

It seems that our future rests with the larger operators and we must find a way to make the UKCS more attractive to them in order to regenerate the major projects that have been postponed or cancelled.

These include, for example, Nexen’s Buzzard, Talisman Sinopec’s Auk, Shell’s Gannet and BG’s Jackdaw.

To kick-start new investment programmes, I urge you to overhaul the tax structure applicable to North Sea operators.

Supplementary UK taxes are no longer sustainable. At the same time, the industry should be pressed to undertake an aggressive review of the development and operating cost structure of the basin.

Current operating costs of $30 dollars a barrel must be significantly reduced. This should surely be a priority for the OGA? It is tasked with maximising economic recovery (MER) from our North Sea assets. This is now a huge challenge.

Since the formation of the OGA and the template for MER, developed by Sir Ian Wood at the request of the Government, the dynamics of the UKCS have changed dramatically. Economic recovery today at $45 dollars a barrel is an entirely different proposition from that visualised by Sir Ian in 2013.

Exploration drilling has not improved in the past two years. However, in mature fields like Forties and Beryl, infield drilling – whereby additional wells are drilled from existing platforms – supported by 3D and 4D seismics, are combining successfully to identify and exploit new reservoirs.

We must encourage more of it. Might Brent, for example, have a prolonged life, and would the Southern Sector release similar prizes if a similar approach to 3D seismic and infield drilling was taken by the operators concerned? This is a matter that should be the focus of urgent attention for the OGA.

I hope that you will energise your colleagues in the Treasury, DECC and BIS, as well as in the OGA, and urge them to help the offshore manufacturing industry turn the crisis we face into a brighter future.

Finally, I must remind you that the few remaining UK fabricators in the North Sea industry now have empty yards. A combination of cancelled projects, contracts being placed overseas and, most recently, Maersk’s unwillingness to offer tendering opportunities in the UK for its Culzean Field have left us all with dry pipelines. On September 1 Amber Rudd wrote to me: “Despite the current uncertainty created by the weakening oil price, I am confident there are a number of other offshore projects in the pipeline.”

The tens of thousands of employees who have been made redundant since September would find that sentiment very hard to entertain.

Dennis Clark OBE

Chairman

OGN Group