Budget 2016: Oil and gas

Oil and gas cut ‘will help stimulate investment’

Oil rig vidStruggling oil and gas companies were handed a tax cut by the Chancellor although analysts believed he should have gone further.

Mr Osborne used the opportunity to attack the SNP over its ability to support the industry.

The supplementary tax is cut to 10% and the petroleum revenue tax abolished entirely.

Mr Osborne said this was an example of what could be done because of the “broad shoulders” of the UK. By contrast, if Scotland had voted for independence it would be facing separation in the next eight days and could not have offered this package of measures.

Alan McCrae, PwC’s UK head of energy tax, said: “The Chancellor’s announcement of a reduction in tax rates and effective abolition of Petroleum Revenue Tax is a welcome boost for our oil and gas industry, which has been facing exceptionally challenging times over the last 12 – 18 months.

“Across the North Sea, this will reduce the 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 recognises 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.

Oil & Gas UK welcomed the Chancellor’s acknowledgment of the challenges facing the industry.

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

Deirdre Michie, Oil & Gas UK’s chief executive, commented: “Today’s announcement does indeed mark further progress in modernising the tax regime for an increasingly mature basin. 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 organisation said 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 Oil & Gas UK said should assist the asset trading market.

Regarding exploration, the industry said it 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.

Oil & Gas UK also noted that there has been further adjustment to the Investment Allowance to facilitate investment in infrastructure, aimed at supporting the drive to maximise economic recovery.

Oil & Gas UK, among a number of organisations, has been calling on the Government to support the competitiveness of UK oil and gas production and lighten the burden of special taxes paid by the sector in order to attract international investment back into the UK and sustain activity in the years ahead.

Derek Leith, EY head of oil & gas tax, said the tax cuts “will fall short of industry expectations”.

He said: “Since 2011 there has been a compelling case to lower the tax burden to recognise the maturity of the basin, the high cost base, and the falling production efficiency of older assets which support vital offshore infrastructure.

“The case for a significant change to the oil and gas regime has been exacerbated by the collapse in the oil price. Decisive action by the government was required to send a strong signal to investors.

“Today’s changes, while welcome, are a missed opportunity to be more radical and abolish supplementary charge completely which would have simplified the regime by sweeping away the complexity of investment allowance and its interaction with decommissioning losses.”

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