Chloe Smith – 2012 Speech to the Oil and Gas Fabricators Conference

Below is the text of the speech made by Chloe Smith, the then Economic Secretary to the Treasury, to the Oil and Gas Fabricators Conference on 27 July 2012.

Introduction

Good evening, and thank you for inviting me to speak to you today.

Even as we move towards a lower carbon economy, no one should be in any doubt as to the continued importance of oil and gas, which still provide nearly three quarters of the UK’s primary energy needs.

Oil and gas is one of the UK’s greatest industrial success stories, supporting a third of a million jobs, and successfully extracting the equivalent of 41 billion barrels of oil to date.

The supply chain – and fabricators such as yourselves in particular – plays an especially crucial role in making the oil and gas industry what it is today.

Highly skilled supply companies have developed a global reputation of excellence – which I was pleased to see recognised in an Economist article only last week.

I myself have seen this work in Aberdeen.

And I am particularly pleased to be in Norwich to discuss how we can help the sector continue to flourish, as the Southern North Sea and this region play a considerable part in that success as a centre of excellence for offshore activity and expertise.

In conversations with companies operating in the North Sea, it always strikes me that this is a truly global market – not only in terms of the commodities that are sold, but also in terms of competition for capital and jobs.

Companies can choose to invest in the UK or in Canada, Brazil or Nigeria.

A trained engineering graduate can begin their career in the Southern North Sea or in Norway, the Gulf of Mexico or Australia.

We recognise that, as the UK Continental Shelf matures, and other basins compete for the skills and investment it needs, Government and industry need to work together to adapt accordingly.

Let’s be frank – we need to ensure we extract the full benefit from the oil and gas that remain under the shelf.

The UKCS has many advantages:

– a superb hydrocarbon system;

– a wealth of seismic and production data;

– superb infrastructure; and

– oil companies that lead the world in skills and capability.

It is important that we play to these strengths and exploit them fully.

So I want to take a few moments today to talk to you about how we do that – working with industry to ensure that, through investment, innovation and the tax system, we can secure the greatest benefit for the UK that our rich natural resources can offer.

State of the sector

I am pleased to see that 2012 is already shaping up to be a successful year.

DECC expects a substantial increase in offshore field approvals over last year, on top of the many other discoveries already being worked on; and applications for the 27th licensing round are the largest since offshore licensing began almost 50 years ago – 35 more than the previous record.

And I was very pleased to see Oil & Gas UK’s most recent Business Confidence Index show a significant rise in confidence in the first quarter of 2012.

I am keen for the industry to maintain this momentum, by making the most of the many opportunities still available.

Fiscal measures

We recognise that the Government has a crucial role to play in ensuring that the regulatory and fiscal regimes help to deliver the best possible future for the UKCS.

And today I want to focus on some of the recent decisions we have taken that highlight the Government’s commitment to delivering a fiscal regime that encourages investment and innovation – as well as ensuring a fair return for UK taxpayers.

We have been engaging constructively with companies at an individual and industry-wide level on tax issues that could promote confidence and facilitate further investment in the basin.

And at this year’s Budget we announced a package of measures to secure billions of pounds of additional investment in the UKCS.

… Adopting a contractual approach to offer long term certainty on decommissioning relief, delivering billions of pounds of extra investment;

… A new £3 billion allowance for deep fields with sizeable reserves, targeted at the west of Shetland

… A significant expansion of the value and size threshold for the small field allowance

… As a signal of our intent, we brought in legislation giving Government the power to introduce a brown field allowance.

… And only yesterday the Chancellor announced further support for the gas industry alongside wider measures on the UK’s energy market as a whole.

This included a new allowance aimed at securing investment in large shallow water gas fields in the North Sea. This is likely to benefit investment in this area – the Southern North Sea – in particular, and I am pleased that this has been welcomed by the industry.

Taken together, the changes we have made to the field allowance regime aim to encourage investment in commercially marginal fields – ensuring that, as a country and for you as an industry, we continue to make the most of the rich resources available to us.

The positive effects of these changes will be felt across the industry, including throughout the supply chain.

These changes also follow from excellent engagement between Government and industry.

Earlier this month I chaired the second meeting of the Fiscal Forum in Aberdeen – a Forum we established to provide a regular, structured basis for the ongoing discussions on the key tax issues facing the industry, complementing the excellent work done by DECC’s PILOT group.

I warmly welcome the constructive engagement we have seen from all sections of the industry attending.

And I know that there is important work still to be done. Earlier this month, I was pleased to launch our consultation on Decommissioning Relief Deeds, and I look forward to hearing industry’s views on the issues we raise there.

Following the introduction of the necessary legislation, and in recognition of the importance of ongoing investment in older fields, discussions are also ongoing between Government and companies on a potential brown field allowance.

It is through this kind of co-operation that we can ensure that Government and Industry can deliver together for the UK – not just on the fiscal regime, although that is clearly a key part of our thinking, but also through ensuring the sector has the access to the skills and technology it needs to reach its full potential.

Technological challenges

The best overall outcome from the basin will require innovation and advances to existing technologies.

We have made changes to the tax regime to encourage innovation, including improving the viability and generosity of R&D tax credits, and we need to continue to look beyond fiscal policy at the support Government can offer.

My Ministerial colleagues in DECC are tackling the challenges of maintaining our infrastructure through PILOT, and I know the workgroup is due to report back to them in the Autumn.

And DECC are also working to deliver an “Innovation Demand Chain” event at the beginning of November to share challenges and connect operators with developers.

Skills

But the success of the sector is reliant not just on the best technology, but also on the best people.

The strong supply chain we have brings quality, highly paid jobs in an exciting industry – whether in the UKCS, or any other hydrocarbon-producing country, where our expertise is highly prized.

The subsea sector in particular has been very successful in recent years and is forecast to continue growing at around 8 per cent this year.

With the potential to create an additional 10,000 jobs in the next two years in that part of the industry alone, it is imperative we have the training to get the right people with the right skills in the right place.

In recognition of this, the Government – particularly my colleagues at BIS and at DECC – has established close working relationships with OPITO, Cogent and Skills Development Scotland to address the skills challenge.

Together, we are ensuring the opportunities and rewarding prospects of the industry are promoted to young people, as well as the jobs for highly skilled and qualified individuals looking for employment or changing career from other industries.

Summary

I have set out today what we are doing to help the industry continue to benefit the whole of the UK through making the most of the energy resources we enjoy.

Without the fabrication industry, we would never have experienced the energy revolution we did, alongside the wealth and economic stimulus that oil and gas has given us.

We need to continue to work in partnership – government and industry – to ensure that that continues: getting regulation right; getting the tax regime right; and developing and applying the right skills and technology.

From what I can see of the programme of papers, it is clear that you are continuing that tradition, and long may it continue.

Thank you.