Scottish Energy Minister Fergus Ewing has called for Westminster to urgently reform the UK tax regime on North Sea oil and gas operating and exploration companies to help the industry through a slump in crude prices.
Around $1 billion of oil company capital expenditure in drilling for new wells around the world is expected to evaporate this year after crude oil prices fell by 50% from last summer to the start of this month.
And the head of Britain’s oil and gas industry trade body has admitted that ‘oil and gas exploration in the North Sea has virtually dried up’ amid a continuing oil glut.
Ewing’s three main proposals for helping the economically (and politically) important fossil-fuel energy industry centred in Grampian comprise:
- An investment allowance to provide support for fields that incur higher costs to develop;
- A phased and timetabled reversal of the increase in the Supplementary Charge implemented by the UK Government in 2011; and
- Introduction of an exploration tax credit to help increase levels of exploration and sustain future production.
Speaking at a business conference in Edinburgh, Ewing sought to re-assure employers, employees alike that the N. Sea oil and gas industry has a long future ahead. He said; “The oil and gas industry has been, is now, and will continue to be an enormous asset to Scotland. It has contributed over £300 billion in tax revenues to the UK and has turned Aberdeen into a global hub of innovation and engineering ingenuity.
“With fields such as Clair and Mariner expected to be still producing beyond 2050, the sector will continue to operate for decades to come.
“While the North Sea is a mature basin, there are also frontier regions, such as West of Shetland, with huge prospects and a diverse range of development opportunities. The current fiscal regime is a barrier to this development.
“However, because of the mismanagement of oil and gas fiscal policy by the UK Government, challenges remain and we must tackle the on-going cost pressures and the fall in oil prices head on.
“That is why the Scottish Government is publishing a report setting out a range of taxation changes and we will now consult closely with industry on these proposals.
“Our proposed fiscal changes will not only boost the economy but analysis based on industry data shows that they will support thousands of jobs.
“We are calling for an investment allowance – as recommended previously by the Scottish Government in 2011 and Scotland’s Oil and Gas Expert Commission last year. This will simplify the fiscal regime and potentially boost investment by between £20 billion and £37 billion – supporting up to 26,000 jobs annually.
“Last year the UK Government announced a 2% reduction of the Supplementary Charge rate – this reduction doesn’t go far enough. We are calling on the UK Government to provide a clear timetable to fully reverse the increase brought in in 2011. That will provide a strong signal for investors that the North Sea is open for business.”
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St. Andrew’s House wants phased reversal of the increase in Supplementary Charge alongside a clear timetable to provide clarity for investors. This will provide a strong signal to investors that the North Sea is open for business – which could encourage over £7 billion of investment.
Ewing added: “We are calling for an Exploration Tax Credit. Exploration is already at a historically low level and failure to address it will mean we do not maximise the economic recovery of oil from the North Sea.
“After years of using the North Sea as a cash cow the UK Government must finally and urgently take substantive action. We believe there is a long term sustainable future for the North Sea and we are committed to using every lever at our disposal. It is time for the UK Government to follow suit.”
Commenting on the Scottish Government’s announcement regarding the UK oil and gas tax regime, Malcolm Webb, Chief Executive of Oil and Gas UK, said:
“Sharply falling oil prices are now adding to the significant challenges the UK offshore oil and gas industry was already facing. The current tax regime is one such challenge and a key factor for companies making decisions on investment and activity. All helpful insights on that issue are welcome, so we will certainly respond to the Scottish Government’s request for views and information.
“We would hope this exercise will complement the crucial work already well underway between the UK Treasury and the industry to make urgent changes to the UKCS tax regime in order to both sustain and encourage further investment.
“If the Treasury’s new Investment Allowance is to have any impact it must be implemented by Budget 2015 at the very latest. However, with the oil price now at around $50 per barrel, it is becoming increasingly apparent that this measure is not enough and a significant reduction in the headline rate is required.
“We are encouraged to see a growing political and industry consensus around the now pressing need for yet more fundamental and urgent changes to the tax regime. We are committed to playing a fully engaged and constructive part in this important process of reform and looks forward to working with both the UK and Scottish governments and all other stakeholders to that end.”
Ewing also noted the continuing support for skills development in the sector – Scottish Government, Skills Development Scotland and the Scottish Funding Council – are all working with Opito and the industry to deliver the immediate and long term skills needs of the sector.
Progress has been made with the establishment of Energy Skills Scotland and the publication of the Energy Skills Investment Plan which is currently being refreshed and will be published in the coming weeks, he added.