N. Sea oil industry pleads for urgent British tax cuts as US shale oil glut leads to cut in UK petrol prices

 

Malcolm Webb, Chief Executive, Oil and Gas UK
Malcolm Webb, Chief Executive, Oil and Gas UK

By DARA BUTTERFIELD

The Oil & Gas UK trade association has called for urgent tax cuts from the British exchequer in light of escalating industry costs and the falling oil price, which yesterday hit a four year low.

Falling world – and UK – oil prices are the direct result of a 30-year high in American oil production, based in record shale gas/oil production and, in turn, the decision by Saudia Arabia to cut the price of the oil it sells to the USA to preserve market share.

Benchmark Brent crude from the North Sea and West Texas light oil prices – which are priced in US dollars – has fallen from around $100 a barrel to about $80.

A direct consequence of this is that petrol-pump prices in Scotland/ UK have fallen by 50p/gallon the since the start of this month to around £5.50 / gallon from more than £6/ gallon.

In a letter to the Chancellor of the Exchequer, Oil & Gas UK Chief Executive Malcolm Webb points to the deteriorating economics of the mature UK Continental Shelf (UKCS), a situation which has become even more acute since the trade body submitted its evidence at the beginning of October.

The Brent oil price has fallen $30 since its peak in mid-summer and shows no sign of recovery, while industry unit costs rose by 26% last year. “Profitability on the UKCS is insufficient to maintain the uncompetitive high tax rates of 62 – 81% paid by production companies,” says Malcolm Webb.

The Office for National Statistics shows pre-tax returns for the UKCS have fallen to levels last seen in 2005, when the oil price was less than $50 per barrel and tax rates were 22 percentage points lower.

Far from gaining additional tax receipts from the UKCS, revenues have fallen by by more than 60% in three years and the OBR has predicted further decline, even before the recent price adjustment.

Webb added: “Last year total UKCS expenditure exceeded post-tax revenues; this year it is heading in the same direction. This is not a sustainable situation. Without swift action, capital investment is set to halve by 2017. Urgent tax reform is now needed for the North Sea to remain globally competitive and attractive for investors.”

In the response sent to the Treasury in October, Oil & Gas UK called for the following key fiscal reforms:

  • Immediate removal of the increase in supplementary charge introduced in 2011 to reflect the lower profitability across the UKCS
  • Introduction of a single, uniform capital investment allowance to embrace all capital expenditure including exploration and infrastructure
  • Tax incentives to make exploration on the UKCS more attractive, both by improving the potential returns, and by encouraging new entrants
  • Removal of the timing restrictions for the Ring Fence Expenditure Supplement
  • The reduction to zero, over time, of the rate of Petroleum Revenue Tax

Webb said: “Since the beginning of October when we made our initial submission, pressures on the N. Sea oil and gas sector have become even greater. The industry is now taking urgent steps to address its significant cost challenge, promoting efficiencies through innovation and simplifying work practices and processes.

“But the Treasury too has a critical role to play in the implementation of the Wood Review’s recommendations as one of the three crucial parties (alongside industry and the new Oil and Gas Authority) with the remit to rebuild confidence in Britain’s offshore industry and maximise recovery of oil and gas from the UKCS.”

Oil & Gas UK now urges the Treasury to act swiftly to protect the investment, jobs, exports, revenues and energy security which, with the right measures in place, could continue to bring great benefit to the UK in the years ahead.

* Dundee-based SafeHouse Habitats has become the latest company to join the offshore oil and gas trade association.

 

 

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed