North Sea producers have been given a tax break in the UK Government's 2016 Budget, announced today.
Amid falling oil prices, high costs and falling production, Chancellor George Osborne had already made some tax reductions and created new allowances for oil and gas operators in the 2015 Budget.
But, recognising the industry had been "severely effected by global events," and that the oil price had continued to fall, Osborne said he would cut the supplementary charge on producers from 20% to 10% (it had been cut from 30% to 20% in 2015) and would "effectively abolish PRT (Petroleum Revenue Tax, a tax applied to older fields and already reduced from 50% to 35% in last year's Budget). The moves will be back dated to 1 January, he said announcing the Budget today.
However, industry commentators have already questioned if the measures will go far enough and suggest an opportunity was missed to simplify the tax regime. There's also a question over a proposed restriction on losses, which could impact those trading at a loss. One also pointed out that the UK Treasury was currently making no money from PRT anyway.
In 2015, oil prices averaged US$52/bbl, compared to a high which reached $110/bbl in 2014. This year, prices have hovered around $30-40/bbl. The dramatic fall has seen tens of thousands of jobs in the industry, many in Scotland, cut.
Even prior to the fall in the oil price, the industry had been struggling with increasingly high costs, as a mature basin with falling production rates, and low rates of exploration. This led to some tax allowances for particular types of fields, such as deep water, west of Shetland, brownfield and high-pressure, high-temperature, investment, and the the Wood Review, commissioned in 2013 and delivered in 2014, which outlined a tranche of measures to boost the industry, to maximize how much could be ultimately extracted from the North Sea basin. This included setting up a new regulatory body, the Oil and Gas Authority.
However, the fall in the oil price has put even more pressure on the industry. While the industry has made in-roads into reducing operating costs, from $29.3/bbl late 2014, to an expected $17/bbl this year, some have called for the supplementary charge, which is an additional tax on producers on top of standard corporation tax, to be dropped entirely.
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The move to cut taxes on North Sea producers was greeted with scepticism from Greenpeace, which said cutting support for clean energy while trying to prop up the North Sea oil and gas sector made no economic or environmental sense.
Richard Cockburn, Energy Partner at Bond Dickinson said: "The tax reductions announced today by the Chancellor will help significantly to improve the economics of North Sea projects. The effective abolition of PRT 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 & Gas UK has been predicting 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."
Alan McCrae, PwC’s UK head of energy tax, commented: “Across the North Sea, this [the removal of PRT and reduction in the supplementary charge] will reduce the [tax] rates from 67.5% for the older fields and 50% for the newer fields to 40% for all fields. This is aimed at stimulating investment at a time when the industry desperately needs it.
“It is a smart move that recognizes that the tax prize for the Treasury at this stage in the life of the North Sea is not corporate taxes. Instead the Government has more tax revenue to gain by doing all it can to protect investment and jobs and all the tax that goes with that.
“The industry is also in line to get help to ensure that companies that incur decommissioning costs get relief for that expenditure. This will help future deals and will be broadly welcomed by operators."
Martin Findlay, senior tax partner with professional services firm KPMG in Aberdeen, said the move would have modest annual impact, being a direct result of relatively low tax take.
He added: “However, 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 maximize the North Sea opportunity when the commodity price recovers.”
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