Scotland's Independent Expert Commission on Oil and Gas: report

10. Transition

Key Messages:

• The UKCS is now on the edge of transformative change by necessity and there are various transitional issues which must be given due consideration as a result.
• Change must be managed and implemented in a way which encourages, and does not impede, the required investment.
• In order to deliver continuity for the industry, there should be a coherent regulatory approach to management and implementation, whether under a single or dual jurisdiction, post September 2014.
• This will require a positive approach from governments and their departments to evolving policy with a view to achieving TVA, encouraging investment and safeguarding the interests of society and the environment.

Context

1. It is important in any industry where regulatory or fiscal change is on the horizon that the transition to a new structure or to new rules is handled carefully. The UKCS is now on the edge of transformative change and there are various transitional issues which must be given due consideration as a result.

2. This inevitable change must also be seen in the context of the Scottish independence referendum on 18 September 2014, which represents the potential for constitutional change and a different but related set of transitional issues to be addressed.

3. These two sets of circumstances are not mutually exclusive and must therefore be carefully managed by both the Scottish and the UK Government in the best interests of the industry and of the people of Scotland and the United Kingdom.

UK Governance Structure

4. Following the publication of the Wood Review, it is clear that a new governance structure for the UKCS is likely in so far as stewardship of its natural resources is concerned. Stability and predictability are imperative not only with respect to the fiscal arrangements for the oil and gas industry but also with respect to the regulatory framework within which it is operating.

5. Sir Ian Wood has demonstrated convincingly that a new, more proactive and effective, form of regulation is required and the industry appears largely to be in favour of this. However, this change must be taken forward quickly and in close consultation with the industry to ensure that a period of uncertainty does not contribute further to the sub-optimal business conditions pertaining in the UKCS.

6. The UK Government and the Scottish Government have both made clear their strong support for the recommendations within the Wood Review and the UK Government have announced that it plans for a CEO of the new Regulator to be appointed by July 2014 and for an interim body to be established by October 2014. These timetables must be adhered to and Government and the new Regulator must be swift in setting out a clear framework for this new governance model and a clear strategy.

UK Fiscal Regime

7. Changes proposed within this report should be carefully considered by both the Scottish Government and the UK Government and used to form clear policy proposals in relation to the future fiscal regime for the UKCS.

8. The UK Government has now announced their own review into the fiscal regime to assess its appropriateness for a mature region such as the UKCS, the results of which will be announced at the Autumn Budget Statement 2014. The Commission proposes that the recommendations contained within this report are considered as part of that review.

9. It is important that any changes to the regime, even when they are considered to be in the positive, should be properly consulted upon, and should be confirmed and implemented within a well-publicised timescale to enable the oil and gas industry to take full account of any such changes within their future business plans.

10. It is of paramount importance that during any transitional period with respect to changes to the fiscal regime the rules in relation to applicability are made absolutely clear to ensure transparency and certainty to aid companies' investment and planning decisions.

Decommissioning under the UK Government

11. The Decommissioning Relief Deed has been welcomed by the industry due to the certainty it brings in relation to the treatment of decommissioning costs and due to the reduced burden on industry in bearing those costs.

12. The effects of this are yet to be seen in the way operators deal with the transfer of assets and the speed at which assets are being decommissioned. The introduction of a more proactive program for decommissioning, led by the new Regulator, will be a catalyst for long term planning based on an industry wide strategy, with greater certainty in relation to costs.

13. Again, since the costs associated with decommissioning are a major factor affecting commercial decision making it will be important for any new strategy to be sensitive to those decisions and the impact they can have on investment.

Recommendation 1: In relation to any regulatory or fiscal regime change within the UKCS, the aspiration should be for visibility and continuity over the short-term, minimum disruption in the medium term and clarity for the long-term.

Constitutional Change

The UKCS Regulator

14. In the event of a Yes vote, the Commission believe it would be important for maintaining sustained investment for the Scottish Government and the UK Government to agree a joint approach to the establishment of the new Regulator for the UKCS as proposed by the Wood Review.

15. Whilst the Scottish Government propose independence day would not be until March 2016, it would be important for the Scottish Government to play a large part in the development of this Regulator and the implementation of Sir Ian Wood's recommendations.

16. Under independence, the boundaries between the Scottish portion of the UKCS and the rUK portion of the UKCS would be subject to negotiation. This will be guided by well-established principles of international law.

17. International precedent tells us that the vast majority of fields will be within the Scottish portion of the UKCS, which leads to the natural conclusion that the new Regulator should transfer predominantly to the control of the Scottish Government upon independence. It also makes practical sense for the same Regulator to serve the rUK portion of the UKCS under an arrangement of shared competence.

18. The Regulator would in this case work to both the Scottish Government and the rUK Government, and would provide the stewardship function for all areas of the UKCS in accordance with the policies set by the two governments. Initially those policies are likely to be the same or very similar, however, with different geological features and challenges, it may be appropriate for specific policies to diverge to a certain extent.

19. The Commission believe that the Regulator should have a formal right of consultation in relation to fiscal or regulatory issues, which could have an impact on investment or production in the UKCS. This should apply equally to decisions made by a Scottish and an rUK Government.

20. Clear governance arrangements would require to be set to ensure swift decision making and to ensure as far as possible that policy implementation and maintenance is coordinated.

21. These teams should share skills and knowledge and collectively advise both governments on the impact of any policy proposals - with a view to maintaining complementarity as part of the Regulator's formal right of consultation.

22. It would be very important for both governments to ensure that regardless of the outcome of the referendum, the establishment of the Regulator is not delayed. It is important for all concerned that this regulatory reform, as well as the recommendations within this report, are implemented quickly and with clarity of purpose, to ensure the advancement of MER and TVA.

Recommendation 2: Governments must facilitate a swift and transparent boundary determination to ensure certainty for industry.

Recommendation 3: The new Regulator should operate within a single regulatory framework with dual government policies.

The Fiscal Regime

23. It is of critical importance that the Scottish Government, upon a Yes vote, issue a timely and clear statement confirming its plans and commitments in relation to the fiscal framework to provide certainty for industry.

24. In particular, this should set out clearly the way in which individual companies' tax positions will be dealt with in the transition period and the UK Government must cooperate in order to ensure clarity and continuity for the industry.

25. Data transfer from the UK Government to the Scottish Government would be necessary in order to ensure effective continuity. Both governments must act in good faith, cooperating on areas of mutual national interest, and in recognition of the interests of the industry. This would also be necessary in relation to the transfer of licensing data currently held by the UK Government.

26. It has been recognised by the Wood Review and by this Commission that there is a need for much closer collaboration and consultation between the new Regulator and the Treasury. Further consideration should therefore be given to the structure of an independent Scotland's governance arrangement.

27. As a minimum, and regardless of the result of the referendum, the Commission has recommended that the new Regulator should have a formal right of consultation in relation to any fiscal or regulatory issue which could have an impact on investment in, or production from, the UKCS. That consultation must be meaningful if it is to have the desired effect and it must have at its core, the principles of MER and TVA.

28. Both Governments should adopt a collaborative approach with regards to the operation of the fiscal regime going forward, with a view to maximising synergies, minimising costs and with a clear focus on providing clarity and certainty to the industry.

29. Putting stability and predictability as central to the fiscal regime, the Commission recommends that while basic policies may well differ between Scotland and the rest of the UK, as far as possible policy implementation and maintenance should be coordinated.

30. The new Regulator should serve both Governments and all regions of the UKCS, the Scottish portion and the rUK portion. Policy implementation and maintenance with respect to taxation should recognise that there will be some companies operating on both sides of the border and the new Regulator should therefore have a role in advising both Governments on maintaining complementarity as part of its formal right of consultation.

Recommendation 4: Both governments should adopt a collaborative approach with regards to the operation of the fiscal regime, with a view to maximising synergies, minimising compliance costs - with a clear focus on providing clarity and certainty to the industry.

Health and Safety Regulation

31. In the event of a Yes vote, the establishment of a single regulatory regime for health and safety with dual governmental policy control by the Scottish Government and the rUK Government would contribute towards providing clarity and comfort for industry, reducing uncertainties and maintaining continuity for projects going forward.

32. This approach would also reduce compliance costs for both Government and industry, maximising the potential for new investment and the initiation of projects already agreed in principle. It would ensure minimal delay to the project pipeline and encourage investment decisions in the UKCS over any transition period.

33. A single regulatory regime for health and safety would remove any potential barriers that might result from border variations, easing the movement of personnel, infrastructure and installations throughout all of the UKCS.

34. This could include arrangements of shared competence being established in relation to the Health and Safety Executive and all associated organisations with responsibility over Emergency Response, including the MCA and the Air Accidents Investigation Branch, ensuring that a cohesive regime is maintained.

35. Any potential future moves to establish a separate regime for the regulation of offshore health and safety - for example a Scottish Health and Safety Executive - would require meticulous planning and consultation with industry over time.

36. Continuity and minimal disruption should be ensured throughout any transitional phase.

37. Careful consideration would require to be given to the wider, and not insubstantial, remit of the Health and Safety Executive and any new regulatory body established over time must build towards the vision of making the UKCS the safest place to explore for and produce oil and gas worldwide.

Recommendation 5: A single regulatory regime for Health, Safety and Emergency Response with dual government policy control is preferred, providing clarity and reducing transitional uncertainties in order to maintain continuity and to minimise the compliance costs for Government and industry.

Environmental Regulation

38. This is currently the responsibility of DECC, and the associated functions are carried out by a team in Aberdeen. In an independent Scotland these functions should transfer to the Scottish Government in so far as the Scottish portion of the UKCS is concerned.

39. Responsibility over Offshore Environmental Regulation could potentially be given to Marine Scotland in light of the existing offshore environmental duties carried out there. The Scottish and rUK authorities should continue to work collaboratively on environmental issues to maximise synergies and reduce costs for industry and for Government.