Scottish Energy Minister Fergus Ewing is today calling on the Treasury to scrap the UK Government’s “oil exploration tax”, after the Treasury confirmed in the budget that it will change the fiscal regime for bareboat charters – the leasing of oil drilling rigs and floating accommodation vessels.
In his letter to Chief Secretary to the Treasury, Danny Alexander, Ewing pointed out that industry experts say the impact of the move will cost more than the benefits to the Treasury, and he said that it was the wrong course of action as it could reduce availability of drilling rigs to the North Sea, especially on the back of Oil and Gas UK’s existing concerns about the level of exploration drilling.
He said: “This measure which changes the basis for taxation of drilling rigs and accommodation vessels supplied using bareboat chartering arrangements, was confirmed despite strong evidence having been put forward by the industry to show that this new tax measure could prove to be very damaging to exploration and development activity – and indeed despite representations made to you by my colleague, Finance Secretary John Swinney.
“This action substantiates the industry’s perception that there is a distinct lack of awareness within the UK Government as to what is required to support and sustain the offshore oil and gas industry to ensure that it continues to be productive for decades to come and it is therefore at odds with the UK Government’s commitment to fully back Sir Ian Wood’s recommendations.
“Colin Pearson, tax partner at Ernst & Young, has argued “the loss of just one field would certainly outweigh the extra tax raised from this measure”. I would be interested to hear your views on this and to understand what calculations have been done in order to guarantee that this will not be the case. Are you absolutely certain that the tax will not have the effect Ernst & Young warn of? If so, please explain why.
“Disbelief of this decision has been echoed throughout the industry as seen by comments made this week by key industry leaders, in particular by Oil and Gas UK, and the International Association of Drilling Companies who both highlighted their concern at the UK Government’s decision on this matter.
“This decision goes against the spirit of the Wood Review, by clearly inhibiting the business conditions necessary to encourage investment in the exploration, appraisal and development that is needed to maximise economic recovery in the North Sea. I therefore strongly believe that the decision must be immediately reversed. “
The Minister also quoted the following industry experts in his letter to Alexander, also copied to Ed Davey, the UK Energy Secretary; –
Malcolm Webb of Oil and Gas UK, fears that “this move will drive drilling rigs, already in short supply, out of the UKCS”.
Taf Powell from the IADC commented that they “find it a surprise that the government on the one hand announces a fundamental fiscal review of the UKCS whilst on the other hand makes a pre-emptive tax move targeting solely the drillers and accommodation providers that are the life blood of the UKCS”.
Furthermore Martin Findlay, tax partner at KPMG said “this will weaken the UK’s competitive position for attracting investment. The fiscal review would have been better served including these changes (the bareboat tax) in its ambit rather than going ahead with this change.”