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Budget: North Sea Oil & Gas

Oil and gas secures £1.3 billion tax package to support investment

North Sea rigA package of tax cuts to help the North Sea oil and gas industry will provide a £1.3 billion boost by the end of the decade.

The Chancellor announced that there would be a single tax allowance to stimulate investment. Petroleum revenue tax will be cut from 50% to 35%, while the supplementary tax is down from 30% to 20%.

“It is clear to me that the fall in the oil price poses a pressing danger to the industry unless we take bold action,” he said.

The measures he was taking would boost production by 15% and his actions were an example of the benefits of the union, he said.

“An independent Scotland would not have been able to afford such a package of support,” he said.

Oil tycoon Sir Ian Wood described Mr Osborne’s package as “definitely an essential lifeline, yet more may need to be done.”

He told a radio interviewer: “The government has recognised the need for a step change. Whether it is enough remains to be seen. Right now it is enough to give the industry back some confidence and put it back on line to be more internationally competitive.”

He said a “very large” number of North Sea assets were up for sale.

“We are facing a very bleak period of time.”

Malcolm Webb, Oil & Gas UK’s chief executive, said:  “Today’s announcement lays the foundations for the regeneration of the UK North Sea. The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness.”

Reacting to the tax cuts Mr Webb continued: “These measures send exactly the right signal to investors. They properly reflect the needs of this maturing oil and gas province and will allow the UK to compete internationally for investment.

“We also welcome the Government’s support for exploration announced today. With exploration drilling having collapsed to levels last seen in the 1970s, the announcement of £20 million for the newly formed Oil and Gas Authority to commission seismic and other surveys on the UK continental shelf (UKCS) is a very positive step.

“Oil & Gas UK has previously welcomed the prospect of a City and Region Deal for Aberdeen City and Shire so we are encouraged by the news that negotiations on this will now begin and also that a similar deal is being progressed for Inverness.

“Along with substantial industry efforts to address its high cost base and the regulatory changes now in train to provide more robust stewardship, the foresight shown by the Chancellor in introducing these measures, will, we believe pay real long-term dividends for the UK economy.”
 
Oil & Gas UK estimates that, in the near-term alone, these measures could incentivise an additional £4 billion of capital investment, enabling the development of 500 million barrels of oil equivalent which at today’s prices are worth £20 billion.

Mr Webb added:  “Continued attention must be paid to improving the cost base and production efficiency of the UKCS in order to secure the maximum effect from today’s changes.

“I commend the Government for its long term vision. The constructive engagement of the Chief Secretary and the Exchequer Secretary in the Fiscal Forum has been of particular value. The industry looks forward to working in the tri-partite approach with the Treasury and the Oil and Gas Authority, as advocated in the Wood Report, to maximise economic recovery of the UK’s substantial remaining oil and gas resource. Stability and predictability will be key for the industry to support British investment, jobs and energy security for decades to come.”

According to Mairi Massey, oil and gas tax director, PwC in Aberdeen, today’s fiscal first aid will undoubtedly help the embattled industry, but it’s not the complete solution. She said: “Today’s 10% cut in supplementary tax, both seismic and investment allowance announcements and the PRT rabbit out the hat cut of 15% to 35%, forming an overall £1.3bn support package, will certainly be welcomed by the UK oil and gas industry.

“However, easing the very high tax regime won’t deliver a complete remedy to the maelstrom going on across the UK continental shelf (UKCS).

“Oil and gas companies have a significant role to play in securing long term sustained efficiencies and opportunities for their business and the wider industry. There are opportunities amid this adversity and this includes a series of levers business leaders can pull to both define and transform the future shape of the company.

“We recognise this may be a much more complex and challenging path. But only by approaching transformation from that vision can we escape short term knee jerk reactions that could wipe out knowledge banks and turn-off suppliers for example, actions which could ultimately damage future business growth and the viability of the wider industry.

“Ultimately if we are sensible about the changes needed, businesses, as well as the oil and gas sector, will be much leaner, more efficient and, crucially for our UKCS, fit for the future.”

Bryan Buchan, Chief Executive of Scottish Engineering, said the measures “will undoubtedly go some way towards rescuing the perilous position of the oil and gas industry, not only for those involved directly in the extraction process but throughout the supply chain.”

He added: “Many of Scotland’s SME machine shops and fabrication operations along with industrial services have grown with UKCS development over recent decades and this business is a core element of revenue for a good many of these enterprises.

“The effect of the drop in oil price and the concomitant retraction in activity has hit home faster than expected with a reduction in output volume and hours worked over the last three months to an extent well beyond what was expected.

“The reversal of the tax grab will hopefully stimulate the industry, making some of the older fields more viable and crucially, promote further exploration which will result from the government’s own initiative in further seismic exploration.”

Liz Cameron, Chief Executive of Scottish Chambers of Commerce, said the measures “will relieve the tax burden on older fields.  These measures were necessary to reflect the challenges facing the oil and gas sector in Scotland resulting from the prolonged low oil prices.  Together with a simplification of the tax allowance regime, this must be the start of a process to develop a strong and coherent fiscal plan for the North Sea that will help to ensure that Scotland and the UK continues to benefit from our natural resources in the long term.”

Derek Leith, head of oil and gas taxation at EY, commented: “At last there is some positive news for the UK oil and gas sector with the reversal of the tax increase of 2011 and a move towards simplification of the regime with the introduction of a cost-based Investment allowance.  The PRT rate reduction is an additional boost for the most mature North Sea fields, which have been taxed at a marginal rate of 81% despite falling production and rising integrity costs.

“As these fields typically host key pieces of North Sea infrastructure lowering the overall tax rate for these fields is vital. Whilst some in industry may have hoped for a more significant cut in the headline rate there was little likelihood of that happening, particularly as the Investment Allowance will further reduce the effective corporate tax rate for those companies continuing to invest in the sector.  The UKCS is a mature oil basin and, to remain capable of attracting international investment, it must have a very competitive tax regime.

“The Government has taken a significant step towards creating such a regime today and industry will hope that further change will be forthcoming in the months ahead as industry, HMT and the new Oil and Gas Authority work together to ensure the longevity of a vital sector of the UK economy.”

Dan Macdonald, founder of independent business group, N-56, said: “The proposed overhaul of the tax regime as it relates to North Sea oil and gas is a much-needed contribution to boosting this sector. It is a great shame however that the tax increases previously  introduced by the Chancellor, and the punitive tax burden it placed on the sector, had such a major impact, exacerbating the issue of global low oil prices and leading to the loss of thousands of jobs.

“It is also disappointing that the Chancellor did not heed our call for government policy and decision makers responsible for oil and gas taxation and regulation to be relocated from London to Aberdeen, moving them closer to the industry itself and echoing the situation in Norway; or for the delivery of a Hydrocarbon Investment Bank, boosting investment in the sector.

“We do however hope that this is the start of a new approach to UK government strategy for the oil and gas sector that takes a longer term view – and that industry and government work together to identify what else needs to be done to deal with short term challenges and the longer term opportunities.

“This would echo the strategic approach taken in Norway where policy has been developed by government, the industry, public sectors and others working collaboratively to identify the measures required to maximise the sector’s long term economic contribution, giving much greater support to the industry than from Government alone.”

Derek Henderson, senior partner in Deloitte’s Aberdeen office, said: “Today the Chancellor has recognised that immediate action was required to extend the life of the North Sea. The changes announced are bold and a big step in the right direction. Without significant action, the consequences for future activity levels would have been severe.”

He said the tax cuts “send a strong message of encouragement to the industry.

“This means at a time of low oil prices, high costs and challenging conditions, headline North Sea marginal rates now range between 50%-67.5%, instead of 62%-81% prior to last year’s Autumn Statement.”

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