Two-cheers for Osborne’s £1bn tax boost for N. Sea – but industry is still ‘hanging on cliff-edge’

North Sea oil well drillingChancellor George Osborne has today announced to tax cuts aimed at boosting N. Sea exploration and output in his budget today.

The industry has been badly affected by a dramatic drop in oil prices, with investment collapsing, nearly half of all oil fields making losses and tens of thousands of jobs lost over the past 18 months.

In recognition of this fall oil crude oil prices, Osborne announced; –

  • The effective abolition of Petroleum Revenue Tax from 35% to 0% (however the tax-raising power remains on the statute book)  and
  • A 50% cut in the supplementary charge from 20% to 10% – worth up to £1 billion over five years – with both back-dated to 1 Jan this year

The Budget will reduce the headline rate of tax paid on UK oil and gas production falling from 50-67.5 per cent to a rate of 40 per cent across all fields.

For the Scot-Govt, Deputy First Minister John Swinney commented: “The support for the oil and gas sector announced at this Budget is welcome.

“While the reduction in the headline rate will improve the long term prospects for the sector, it does not fully address the short term challenges facing the industry.

“Further clarity is now urgently required on how the commitment to consider loan guarantees and improve access to decommissioning tax relief will be able to support the sector in the short term.”

Callum McCaig, MP
Callum McCaig, MP

Aberdeen MP Callum McCaig – the SNP Energy spokesman in the House of Commons – said later: “I’m pleased the Chancellor has responded to SNP pressure and has revised the level of tax for oil and gas companies.

“But he has only cut the total amount of tax from 50% to 40% while cutting corporation tax for other companies to 17%.

“This is a missed opportunity and shows the Chancellor lacks the vision to bring forward a long-term strategy for the North Sea Oil and Gas industry and he has failed once again to introduce measures that would encourage exploration.”

Richard Cockburn, Energy Partner at the Bond Dickinson legal services company, commented: “The tax reductions announced today by the Chancellor will help significantly to improve the economics of North Sea projects.

“The effective abolition of Petroleum Revenue Tax has long been called for by the industry and will be welcomed widely.

“The reduction of the supplementary charge may allow operators to take a second look at projects which, until now, were looking uneconomic.

“Oil and Gas UK has been predicting N. Sea investment approvals of less than £1 billion this year relative to a typical annual figure of £8 billion over the last five years so the Chancellor’s reform has come at an opportune time.”

Peter Searle, Chief Executive of the Airswift energy sector recruitment services company, said: ‘These announcements will go some way to support the North Sea oil and gas industry and reverse some of the cost challenges the Government had previously levied.

“However, there is still a major risk that the industry will continue to lose talent, skills and expertise to other sectors. It remains to be seen if these tax cuts will protect or create jobs for the North Sea.’

Scott Lehmann, Vice-President, Product Management Marketing at Petrotechnics, commented: ‘The chancellor said that this Budget was all about putting stability first and the measures announced today will certainly be welcomed by the oil and gas industry.

“However, even in a more stable environment, operators will continue to face significant pressure to maintain or increase production levels. The industry is already striving to do more with less, but as this focus intensifies it will create new challenges with regards to the emerging safety productivity dynamic.’

Dr Jake Davies, Marketing Director of Permasense – which provides continuous integrity monitoring for the oil and gas industry – said: ‘These measures will help UK operators continue producing at near-record levels, whilst affording the minimal investment needed in novel technologies, to ensure asset availability and safety are maximised and integrity-related incidents are minimised.’

Dundee MP Stewart Hosie (the SNP’s deputy leader in the House of Commons) welcomed the oil and gas tax changes but he was “slightly disappointed in the lack of strategic direction” and that there was no mention of exploration or production allowances for the industry.

Chancellor Osborne could not resist a heavy political insult to the 45% of the people of Scotland who voted for Scotland’s Independence in announcing the N. Sea tax reductions.

He said: “Mr Deputy Speaker, we are able to provide this support <for the N. Sea industry> because of the broad shoulders of the United Kingdom”.

Meanwhile, away from the politics, Martin Findlay, senior tax partner at KPMG in Aberdeen said: “The reductions in headline tax rates for the oil and gas industry announced by the Chancellor, backdated to the start of 2016, are welcome and will help to create a more attractive fiscal framework for this strategically significant industry.

“In the medium to long term, this should make a positive contribution to the maximising economic recovery agenda for the UKCS.  However the headline £1 billion of tax impact is the total over five years, with the relatively modest annual impact being a direct result of relatively low tax take.

“Tax reductions in themselves can only ever be part of the solution, particularly in the short term when the prevailing market conditions are forcing the industry to address its operating models and cost base with significant collateral damage. 

“Maximising production from UK oil and gas fields will only be achieved by reducing unit cost of production and driving through operator and supply chain efficiencies, no matter how painful these are.

“The industry must therefore continue to pursue sustainable cost reduction measures and new ways of working and collaborating, which will better position it to maximise the North Sea opportunity when the commodity price recovers.”

Ian McLelland, analyst at Edison Investment Research, said: ‘With so many companies running in the red, tax reductions are not likely to do much to stimulate investment in themselves. However, today’s proposals increasing the scope of income/costs that qualify for investment allowances, clarification of decommissioning expenditure relief and ring-fence treatment of corporate interest are all encouragingly progressive.

“Meanwhile, the Chancellor’s claims that the “UK has one of the most competitive tax regimes for oil and gas in the world” are still well off the mark.

“In particular we would have welcomed a Norwegian style approach to directly co-fund exploration while protecting the downside risk for developers.

“The future of the North Sea is still hanging on a cliff-edge and the UK Government needs to continue to promote exploration, development and infrastructure to safeguard the industry, security of supply and jobs.

This also requires the cooperation of the wider banking sector, echoing the calls of Sir Ian Wood earlier this week encouraging the government to “lean on banks” to keep funding the troubled industry.’

Deirdre Michie, Chief Executive, Oil & Gas UK, commented: “We welcome these measures as they will build on the industry’s achievements in improving efficiency in the face of low oil prices, boosting the sector’s competitiveness and helping to restore investor confidence. 

“We will continue to work with the Treasury to complete its ‘Driving Investment’ plan to ensure that the fiscal regime reflects the business needs of a maturing basin and signals to global investors that the UK is truly open for business.”

“The Budget also provided certainty on the availability of decommissioning tax relief, where an asset is transferred but the decommissioning liability is retained by a previous owner, which should assist the asset trading market.

“Regarding exploration, industry appreciates the continued funding of seismic and hopes that the tax rate changes prove sufficiently effective alongside steps the Oil and Gas Authority (OGA) is taking to promote exploration activity.

“We also note that there has been further adjustment to the Investment Allowance to facilitate investment in infrastructure, which will also support the drive to Maximise Economic Recovery.”

 

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