Treasury announces review of North Sea taxation

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The UK government has called on the oil and gas industry to submit its thoughts on the future of the its tax regime on the North Sea offshore industry.

The call for evidence will explore how the tax regime can continue to encourage investment in the North Sea and help maximise the value of the country’s oil and gas resources for the UK, whilst ensuring the nation continues to receive a fair share of profits.

The UK continental shelf (UKCS) is a mature offshore oil and gas province and one of the world’s most expensive basins to operate and invest in. Despite current record rates of investments, there are worrying signs that investment will halve over the next four years, whilst exploration remains at an all-time low.

Production has fallen rapidly in recent years particularly in some of the oldest fields in the North Sea which are taxed at rates of up to 81%.

The call for evidence marks the beginning of 12 weeks of discussion with the oil and gas industry and other stakeholders about the long-term shape of the tax regime.

The review comes at an important time for the UK Continental Shelf. There is still a considerable amount of oil and gas left to recover – up to around 21 billion barrels of oil (boe) equivalent.

The basin is currently attracting record levels of private investment – £14.4 billion in 2013, and there are around 125 groups of companies now involved as licensees in offshore exploration and production.

There are some 300 offshore oil and gas fields in production and the sector:

  • provides nearly 40% of the UK’s primary energy needs
  • directly and indirectly supports around 450,000 jobs across the UK
  • paid £4.7 billion in upstream taxation in 2013 to 2014

Oil and gas companies operating in the North Sea are taxed at higher rates than other companies, to ensure the nation a share of the profits of production. Marginal tax rates are 62% or 81%, in comparison to the standard corporation tax rate which is currently 21%.

In recent years the government has introduced a number of tax reliefs to encourage investment, particularly in North Sea fields that are smaller or harder to access. These ‘field allowances’ unlocked £7 billion of new investment last year, according to the industry.

The government has also signed decommissioning relief deeds to provide certainty over the tax relief available for decommissioning North Sea infrastructure when production ends. These deeds are worth over £20 billion to the industry.

However, exploration and production is becoming harder and more expensive, and the UK is facing competition for capital from other countries.

As the independent Office for Budget Responsibility highlighted last week, tax revenue generated from the oil and gas industry will continue to decline over the long-term.

The value of the industry to the country will increasingly come through wider economic benefits – through jobs, skills and exports.

Danny Alexander, Chief Secretary to the Treasury, said: “This review offers the opportunity to put the fiscal regime on the best footing to ensure that the economic potential of the North Sea can be maximised for the UK and Scotland.

“The broad and diverse UK tax base means we are able to support the industry through, for example, certainty over decommissioning tax relief.

Nicky Morgan, MP, Financial Secretary to the Treasury, added: “Changes we have made have already unlocked billions of pounds of new investment. This review demonstrates the government’s commitment to working with the sector on the long term future for the industry.”

The government estimates that there are between 11 and 21 billion boe remaining in the British North Sea that could be economic to recover.

For the SNP, Stewart Hosie MP, Treasury spokesperson – said: “The SNP have been calling for certainty in the North Sea for years – and in the run up to the referendum suddenly Danny Alexander admits there is a problem with the way the UK government treat this important industry.

“Certainty in the way the North Sea is taxed is an absolutely key requirement, and anyone in the industry now will tell you the current arrangements are far from certain and very far from ideal.

“The unpredictability of the Westminster fiscal regime has caused uncertainty in the industry for years. In the last few years of this UK government alone, we have seen a massive hike in the supplementary charge – the panic introduction of new field allowances – and even this year the introduction of  changes to the way oil rigs and accommodation vessels are taxed. If the UK government is serious about certainty – as they claim – these measures clearly should not have been introduced before a review.”

See also: Salmond accuses Treasury of prioritising short-term gains

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