"We back oil and gas," said George Osborne as he delivered the March 2015 budget in which he announced a new "simple and generous" tax allowance for North Sea operators starting at the beginning of April.
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Speaking in Parliament today, Osborne announced a cut on Petroleum Revenue Tax (PRT) from 50% to 35% from next year, resulting in a headline rate for PRT-paying fields of 67.5%; a cut in the supplementary charge to 20% from 30%, backdated to January; £20m for the Oil and Gas Authority to commission seismic and other surveys on the UK continental shelf (UKCS); and a simplified investment allowance.
Overall, Osborne says the Office for Budget Responsibility’s assessment predicts production will be boosted by 15% by the end of the decade as a result of these measures.
The new fiscal regime is a response to calls for tax reforms from trade body Oil & Gas UK, along with Scottish Minister Fergus Ewing and industry veteran Algy Cluff. The trio argued current tax levels were unsustainable.
Osborne’s budget will no doubt be welcomed by an industry that has been under pressure due to rising costs and a major fall in the global oil price. But does the government’s support go far enough to secure the future of the industry?
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Industry reaction
Edison Investment Research analyst Ian McLelland said OBR’s assessment of a 15% boost to production by the end of the decade is "nothing transformational" and that Oil & Gas UK had already predicted this as its central forecast in its most recent 2015 industry outlook.
However, Oil & Gas UK itself was more positive. In his response to the budget, the trade body’s chief executive Malcolm Webb said today’s announcement lays the foundations for the regeneration of the UK North Sea.
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"Oil & Gas UK estimates that, in the near-term alone, these measures could incentivise an additional £4bn of capital investment, enabling the development of 500 million barrels of oil equivalent, which at today’s prices are worth £20 billion," he said.
"The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness," he added.
Earlier in the year, Oil & Gas UK had lobbied hard for Osborne to abolish altogether the supplementary charge introduced in 2011. Cluff, who has interests on the UKCS, suggested a ten-year tax holiday for any existing discovery not in development or for any future discovery.
Jon Fitzpatrick, senior managing director and head of oil & gas EMEA at Macquarie Capital and president of the Scottish Oil Club, pointed out that although Osborne’s tax incentives are "very welcome", they will "likely only benefit the handful of tax-paying North Sea producers and will not address the much larger, structural issues facing the North Sea oil and gas industry".
He added that there are a vast number of projects that aren’t viable at current oil prices and will be lost before the oil price rises significantly again – in the meantime critical infrastructure will be decommissioned.
"To address the underlying issues and attract substantive third party investment, the industry and UK government need to work more closely to encourage a more aggressive drilling and production programme and protect employment and economic opportunities over the longer term.
"The Treasury only need look across the Continental Shelf border for one such idea: rebates on exploration drilling," he said.
Uisdean Vass, partner at law firm Bond Dickinson, said that, in terms of jobs, the newly announced tax subsidies would "give greater security to the 380,000 jobs in the sector".
Not all were happy about the tax cuts for oil and gas. Greenpeace said ministers should concentrate on smoothing the shift to a greener and more energy-efficient economy, and not waste taxpayers’ money "in a futile attempt to turn back the clock".
A pivotal year for UK oil & gas
Sir Ian Wood, an industry leader who provided the blueprint for the reform of the offshore regulation and tax system, has warned that tax decisions being made this year could be the difference between a likely upper limit of 16 bbl still to be recovered over the next four decades, or as low as 10bn if industry should retreat.
Today’s fiscal reform is the second in the last six months. In the 2014 autumn statement Osborne, acknowledging calls for reform, introduced a 2% reduction to the rate of the supplementary charge from 32% to 30% from 1 January 2015.
The Treasury now has surely shown its long-term support for the continuation of oil & gas operations on the UKCS.
Now the industry must play its part, according to Webb. "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," he said. "Stability and predictability will be key for the industry to support British investment, jobs and energy security for decades to come."
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