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Alexander offers help for explorers

New tax policy ‘better reflects needs of oil industry’

Danny AlexanderThe UK government today pledged to take a broader view of the needs of the oil and gas industry when contemplating changes in taxation.

Treasury secretary Danny Alexander’s (pictured) outline of new policy was regarded as a step back from the days of seeing the industry as a “cash cow” for ministers to plunder.

Instead, today’s unveiling of new investment allowances was seen as an important move towards a better understanding of the cost pressures faced by the industry and the need to adjust the tax burden as new projects become more marginal.

When making judgements on tax the government said it will take a wider view of the economic benefits of oil and gas production.

Addressing a press conference in Aberdeen, Mr Alexander said the investment allowance would reduce the effective tax rate further for those companies investing in the future of the UKCS. A consultation will be published in early 2015.

Options will considered for supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable. The government will open discussions with industry and the new Oil and Gas Authority in 2015, with further consultation with industry. Ministers will also look at decommissioning tax relief.

Derek Leith, senior partner in Aberdeen and head of oil and gas taxation at EY, said:  “The principles set out by Danny Alexander are very much in keeping with the output from the Wood Review, where the focus was on maximising economic recovery.”

He said it was consistent with the findings of the Scottish Oil and Gas Expert Commission, “which stressed that North Sea fiscal policy should focus on the wider economic benefits of the industry rather than merely being a source of tax revenues.

“There could be a sting in the tail by the reference to monitoring commodity prices. However, the industry will be pleased to see that, for the first time, the Government appears to have openly acknowledged that commodity price increases are inexorably linked and closely followed by cost increases to the oilfield services supply chain. Higher prices in themselves don’t necessarily lead to windfall profits.

“The new proposals set out today, will require further work before implementation but clearly seek to support exploration; relieve some of the tax burden from new investment when the headline tax rate is still high; and rationalise the complexities of the current system in relation to infrastructure and decommissioning.

“Provided that these measures can be implemented quickly, and a further tax rate reduction can also be delivered, the government has taken some critical steps to protecting the longevity of the oil and gas industry in the UK.  However, with the low oil price making the need for reform acute, there is absolutely no room for complacency.”

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