Speech by the Chancellor of the Exchequer, RT Hon George Osborne MP, Offshore Europe Conference
The Chancellor's speech to the Offshore Europe Conference.
Good morning.
I’m delighted to be here in Aberdeen at such an illustrious gathering of the oil and gas industry – an industry that is of vital importance to Britain’s economy.
But let us first remember Duncan Munro, Sarah Darnley, Gary McCrossan and George Allison.
Four brave professionals who ten days ago, tragically lost their lives in a helicopter crash off Shetland.
Our thoughts are with their families, friends and colleagues at this difficult time – and the book of condolences here today shows the depth of feeling for those four brave professionals.
And we should also remember that 25 years ago, 167 people lost their lives in the Piper Alpha disaster.
A tragedy that leaves an indelible mark here in Aberdeen on the industry, and the whole community.
Let us pay our respects.
To the brave professionals who lost their lives last month, and on that terrible night 25 years ago.
To their families and friends in whose memories they live on.
To those who survived and the rescue teams who helped them do so.
The whole of the UK owes a massive debt to the thousands of men and women who work in what is an inherently dangerous environment – delivering enormous benefits to every family in the country.
I know that as an industry you sometimes feel taken for granted.
Well, I want you to know this: you are not taken for granted.
You are very much appreciated.
And my personal message to you is this.
First, I recognize the vital role the oil and gas industry plays in the UK economy - and will continue to play for many many years to come.
Second, I also recognize that the oil and gas remaining in the UK Continental Shelf will be increasingly difficult and more expensive to extract – but that this Government commits to play our part in delivering the investment that’s needed.
And third, I believe that the best way to support this industry and maximize the returns from this great national asset is:
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by working together across the UK;
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through mobilizing all the UK’s resources; and
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by pooling our risks to provide stability across the whole UK.
On Sunday, I was on the Andrew Marr TV show.
In his book, the History of Modern Britain, he says that the oil and gas industry’s story is one of the most remarkable and under-discussed in the entire history of our country.
It’s a tale of pioneering geologists, seismologists, roustabouts and rough-necks.
He said that: “The discovery and exploitation of huge oil and gas fields far out under cold, stormy and turbulent waters … is a modern epic of technical skill, bold finance, endurance and individual courage”.
And he is right to compare the feats of North Sea civil engineering with the building of the railways by the Victorians.
I’ll never forget my first visit to a North Sea platform, the Elgin Franklin platform, six years ago.
The long helicopter flight across the bleak, open sea – and then, the pinprick in the distance of the platform looming ever larger – until you land on the enormous construction.
I remember that first, powerful emotion you get when you step out onto a North Sea platform: what an extraordinary achievement of the human spirit and ingenuity.
Later today I will travel out to Talisman Sinopec’s Montrose platform and I know I will feel the same pride in what our country can achieve when we work together.
For from the day 38 years ago, when the first oil was piped ashore in Cruden Bay, the oil and gas industry has brought huge benefits to the whole of the UK.
And it continues to do so today.
Oil and gas still meets around 70 per cent of the UK’s primary energy needs - with more than half of UK demand for oil and gas met by UK production.
The heat and light for our homes;
power for our businesses;
and fuel for the transport for our people and goods.
Directly and indirectly, the industry employs nearly half a million people – almost half of them here in Scotland.
It’s the largest industrial investor in the UK - and it’s investing more than ever before.
And while the expertise for the initial development of the North Sea was largely imported, a world class home-grown industry has sprung up on the back of it.
Over 1,000 companies in and around Aberdeen alone.
Businesses which are now leading an export charge from Azerbaijan and Russia, to Brazil and the Middle East - with international sales of nearly £8 billion from Scotland alone.
As all of you know, subsea technology is a sector where the UK is a global leader - and it’s one of our fastest growing industries.
And I’ve spoken to the subsea’s industry conference here before in Aberdeen to celebrate its success.
Today we capture more than a third of a global market – a market that’s set to double over the next five years.
Growth at home and abroad.
Growth that I want to help you deliver.
Of course, I understand that your industry has changed hugely since the early days of North Sea extraction.
Then, the North Sea was dominated by a handful of ‘majors’ - the BPs and Shells, the Occidentals and Exxons.
Now, there are over 50 oil companies operating in the North Sea - with smaller independents and national state-owned oil companies rubbing shoulders with the original ‘majors’.
New names to conjure with: Apache, KNOC, Petrofac, Talisman, Sinopec, JX Nippon.
While the pattern of ownership today has changed from 30 years ago, the nature of the development opportunities is different too.
Companies are operating in a mature basin.
And that brings me to my second point.
The fact is that the oil and gas remaining in the UK Continental Shelf will be increasingly difficult and more expensive to extract.
You know well that the ‘big’ strikes are fewer and farther between.
The opportunities are often smaller, technically challenging or both - with the oil either in deeper waters or just harder to reach and extract.
In the central North Sea, companies are drilling at water depths of 100 metres.
In the planned Rosebank field West of Shetland, Chevron will be operating at 1,100 metres in waters more than ten times deeper.
New entrants are bringing fresh thinking and impetus, making viable even the most marginal fields.
Normally when politicians visit platforms, they visit the newest field.
But the Montrose field I’ll be visiting is one of the oldest in the North Sea.
I’ve deliberately chosen to go there because I want to see how Talisman Sinopec and Marubeni Oil and Gas’s £1.6 billion investment is extending the life of five fields by 14 years – which means that these fields will be producing the equivalent of an additional 100 million barrels of oil until 2030.
This project alone will be creating and securing 2,000 jobs throughout the UK supply chain. But there are also challenges.
We need to develop a North Sea regime that keeps pace with the changing structure of the basin.
The Montrose project is a case in point.
Its economic viability depends on a complex mix of factors: targeted tax breaks, and bundling a number of older fields with two undeveloped ones.
So, as we think about the future of the North Sea, what can we be certain about?
We can be certain that:
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our reserves aren’t infinite;
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the costs of extraction are rising;
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and North Sea tax revenues are in long-term decline.
But we can also be certain that the ingenuity of the industry will secure its long-term future and that we’ll still be recovering oil from the North Sea and West of Shetland in the 2050s.
We can’t know the precise level of recoverable reserves.
The future is about volume and value.
So nothing can - or should - be taken for granted – and we know that.
The British government’s objective is simple: we want to work with you to maximise the North Sea’s recoverable reserves.
So we’ve put in the place the first ever national Oil and Gas strategy.
The PILOT programme is identifying ways to remove barriers to development.
And, working through the Fiscal Forum, we’re putting in place tax reliefs to support the industry as extraction becomes more difficult.
In my Budgets, I’ve doubled the value and extended the scope of the small field allowance.
I’ve put in place a £3 billion allowance to support investment in and exploration of large and deep fields like those West of Shetland.
And I’ve introduced a £500 million allowance for large shallow-water gas fields and a brownfield allowance to encourage incremental investment in older fields.
Perhaps most important of all, I’ve provided the industry with long-term stability, by providing certainty on tax reliefs - worth upwards of £20 billion over a 30-year period - on future decommissioning costs.
Funded by the whole of the UK, that’s equivalent to £3000 pounds for every man woman and child in Scotland – being used to support investment in the North Sea.
The UK government will enter into contracts with industry setting out what relief companies can expect to receive in future when decommissioning assets.
And if the actual amount turns out to be less, the government will make up the short-fall.
This means assets will be easier to transfer and the climate for investment improved.
I can tell this Conference today I’m unveiling the final decommissioning deed.
A concrete example of the tax certainty this government is providing.
Never before has any government entered into legally binding contracts with individual companies to guarantee the tax relief they can expect decades into the future.
No other place in the world provides such a guarantee.
And your industry – not the Treasury – estimates that this decommissioning certainty will drive at least £17 billion of increased investment, extending the life of the North Sea basin with an additional 1.7 billion barrels extracted.
It’s the culmination of 18 months of hard work and close collaboration between you and government.
Thank you for that.
Now let’s get the deeds signed and get the investment.
And we’re already seeing results from this new tax regime.
Oil & Gas UK are forecasting record levels of investment of £13.5 billion for 2013, helping to stem the decline in production of recent years.
And look at the projects already announced.
Statoil are investing £4.3 billion in the Mariner heavy oil project, creating 700 jobs.
EnQuest, the UK’s largest independent oil producer are investing £170 million in the Thistle field, safeguarding 500 jobs and creating nearly 1,000 more in the supply chain.
CNR International are investing £300 million to extend the life of Ninian field and produce 5 million additional barrels.
And following the introduction of the large shallow water gas field allowance, GDF Suez, Centrica and BayernGas UK are investing £1.4bn in the Cygnus gas field, creating 1,200 jobs.
We want to build on this success.
Sir Ian Wood is currently reviewing how we can improve future economic recovery of oil and gas from the UK Continental Shelf.
He is looking at what further powers the government should have to ensure the North Sea remains a prime location for new investment and that government ensures companies are operating their licences effectively.
Government and industry have a shared interest in maximizing the economic production of the UK’s oil and gas reserves.
I want to see far greater collaboration from industry on production and exploration.
Because the fact is, production efficiency is down.
When ownership of North Sea assets is more widely spread than ever before, collaboration is often the only way to improve the economic viability through economies of scale.
Like:
Access to critical infrastructure.
Keeping in play older infrastructure hubs, so that recoverable reserves aren’t lost forever.
Sharing the benefits of new technologies and extraction methods.
Above all, deploying the best talent to the North Sea so the basin can flourish.
Government and industry pulling together to maximise both of our returns from the North Sea - volume and value.
Let me turn to the bigger picture on energy.
Your message, which we’ve heard and listened to, is the need for predictability so you can plan for the long-term.
That’s what our decommissioning tax certainty is all about.
But this is just one part of our support to the energy market.
We are seeking, from companies like yours and others, tens of billions of pounds of investment to secure Britain’s energy in the decades to come.
And we want a mix – oil and gas are vital, but so too are renewables and nuclear.
My ambition is that when you look across the western world, you see the UK as the best and most stable place to invest – and we’re creating the tax and regulatory regime to achieve it.
Last year, we published our Gas Strategy which set out our expectation that gas generation will be an essential part of our energy supply.
In June, we published draft strike prices for renewable energy generation – providing the certainty needed to make investing in new technologies less risky and more attractive.
We’re introducing ambitious and radical reforms to the electricity market – a new way of paying for generation will bring forward up to £110 billion of private sector energy investment.
We’ve set up a Green Investment Bank to invest in green energy projects and leverage further investment from the private sector.
We’ve already committed to invest up to £3.8 billion through the Bank.
On Shale, let me say this, because I know it’s an issue that has been in the news a lot recently.
Of course, we want exploration of our shale resources to be safe, to avoid environmental damage, and be done in a way where communities get the benefit of what’s happening in their backyard.
That’s why we got the industry to commit to generous community benefits.
But let me also say this.
Britain led the way in finding new sources of energy – coal in the 18th and 19th centuries, oil in the 20th century, and renewables at the turn of the 21st century.
If we turn our back on new sources of energy which countries like China and the US are exploiting, then:
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we’re saying to British families: you pay energy bills that are higher than those paid by families elsewhere;
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we’re saying to British companies: you’ll face costs higher than companies face elsewhere;
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and we’re saying to our country: we’ll have fewer jobs, less investment and higher costs of living – and I’m not prepared to say that to the British people.
Britain is not going to turn its back on the energy sources of the future.
So we’ve set out a generous new tax regime for shale gas and removed the bureaucratic obstacles to its use onshore and offshore.
And when I talk about Britain I mean a United Kingdom.
I’ve talked about predictability in this speech, but I know that one issue that has created uncertainty is the possibility of Scottish independence.
We determined to end that uncertainty by holding a referendum that will reach a decisive outcome next year.
The question of whether Scotland’s future lies within the UK or without needs to be answered.
As an Englishman, I passionately hope people in Scotland vote to stay within the UK in just over a year’s time.
This hope is, I know, shared by the great majority of people living in England, Wales and Northern Ireland.
The reason is simple: we’re better together.
For those tempted to think that the rest of the UK would be better off without Scotland, let me be clear.
Separation would bring consequences for not just Scotland.
We would all suffer.
The rest of the UK is by far the most important market for Scottish goods and services.
Scotland’s trade with the rest of the UK is almost double its entire trade with the rest of the world - and it’s a share that’s growing.
This trade benefits companies and employees the length and breadth of Scotland.
And it’s a two-way street: Scotland benefits from being a strong part of the UK, and the UK also benefits from Scotland’s place within it.
As our economy recovers, I want Scotland to lead the way.
All achieved within the UK, not outside.
So let’s lay to rest some myths once and for all.
Independent European countries of similar size don’t out-perform Scotland.
In fact, Scotland performs well against comparable European States.
Introducing an international border between Scotland and the rest of the UK would reduce business and trade across the border.
You don’t need passport controls and customs officers for there to be a negative effect.
It’s the gradual growing apart of institutions, policies and regulations;
It’s the slow unpicking of the unified labour market, an integrated infrastructure and a single tax system – the possibility of different currencies.
Today, we’re publishing clear analysis that shows the value of Scotland being part of the UK, in terms of extra trade and economic activity over the coming generation.
As the paper says: Scottish GDP could be 4 per cent higher in 30 years if it is part of the UK. £2000 for every family in Scotland.
Put it another way: separate from the UK, create an international border, and the loss to every Scottish household will be £2000.
So, we should think very hard before Scotland exchanges a UK domestic market that works well for a new foreign export market that won’t work as well.
If it ain’t broke, don’t break it.
Your industry is a great example of how we’re better together when we work together, when we are together.
Oil & Gas UK talk about the “need for fiscal predictability and long-term planning to optimize recovery of the country’s offshore oil and gas resource”.
Today all of the major tax revenues, whether it’s from oil, or retail, or consumption, or income or duties are pooled across the UK.
This provides Scotland with secure and stable funding; the Scottish government with budgetary predictability and Scotland’s public services with the stability to plan for the long-term.
As part of the UK, Scotland doesn’t have to cope with the challenge of managing volatile oil revenues.
This is no small challenge – Scottish tax revenues from oil can fluctuate from year to year from £2 billion to £12 billion.
They are the most volatile tax revenues that exist.
Finance ministries are always at risk of being over optimistic about how much revenue they’re going to get in.
That’s why we created the Office for Budget Responsibility.
It is totally independent.
And it now provides for us independent estimates of tax revenues - including from oil and gas.
So when you hear big numbers bandied about that aren’t impartial, and it sounds too good to be true – it probably is.
The UK government can provide the oil and gas industry with a long-term commitment to decommissioning relief.
This commitment represents around 1 per cent of UK GDP.
It would represent around 12 per cent of Scottish GDP.
It’s for the Scottish government to explain how they would pay for that.
The UK’s approach looks at the wider economic contribution of oil and gas, not just at tax revenues.
We’ve been prepared to take the long-term decisions needed to unlock investment.
We accept that’s cost us in lower tax receipts in the short term – but its worth it for the benefits over the long haul.
We’ve been able to pursue this course because the UK has broad shoulders - a big domestic market, a diverse economy, a wide tax base and a broad energy mix.
Look at the facts.
Oil and gas is an important national asset, but revenues from oil and gas are just 2 per cent of our total tax receipts.
Renewable energy is an increasingly important part of the energy mix.
Many of the companies represented here today are also leaders in renewable energy.
Last year over £1.5 billion was invested to develop Scotland’s abundant sources of renewable energy, which now supports over 11,000 jobs and generates nearly 40 per cent of Scotland’s electricity.
This is made possible by over £500 million a year of UK support, with the costs spread amongst 26 million households across the UK, keeping average electricity bills in Scotland lower than they would be if funded by Scottish consumers alone.
How likely is it that this kind of subsidy would be provided to the energy market of a foreign country?
As I’ve said many times before, Scotland could go it alone.
But to suggest that spending can be increased; tax bills cut; an oil fund established; household energy bills kept down and investment in renewables increased simply doesn’t add up.
Texans played an important part in the early exploration of the North Sea.
So you’ll recognise the well-known Texan phrase - “all hat and no cattle”.
I hope those who advocate Scottish independence will offer a little less hat and a bit more cattle.
Let me end by saying this.
How we manage our country’s natural resources goes to the heart of the solidarity between the peoples and nations of these islands.
Whether we are realising the assets from the dark waters of the North Sea or West of Shetland, or shale gas reserves in Lancashire, or coal in Yorkshire or renewable energy in the Thames Estuary and the Firth of Forth.
You have my total commitment to your remarkable industry.
I will work with you to get the tax regime right, to support more investment, to create the climate for more production and more jobs.
My door is always open to hear what you have to say and to help you.
Volume and value.
Valuable and valued.
We know that when we:
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pool our resources
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share our advantages
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and join forces to tackle future challenges
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we achieve far more by working together
Industry and government.
Scotland and Britain.
The whole is so much greater than the sum of the parts.
Thank you.