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October 30, 2018

UK oil and gas industry receives fiscal assurances in 2018 Budget

The UK oil and gas industry has come out on top in this year’s budget, with the government promising to remove tax barriers to the tune of £3bn to encourage North Sea investment.

By Talal Husseini

The UK oil and gas industry has come out on top in this year’s budget, with the government promising to remove tax barriers to the tune of £3bn to encourage North Sea investment.

In his speech, Chancellor of the Exchequer Philip Hammond made reference to UK oil and gas, introducing plans to develop Scotland has a global hub for offshore decommissioning work and stimulating investment in the oilfield services sector.

Under Section 4.105 of the Budget titled ‘Oil and gas taxation: transferable tax history and retention of decommissioning expenditure’, the government noted that the new transferable tax history mechanism would remove tax barriers to new investment offshore, and that the government would also amend Petroleum Revenue Tax laws to simplify the sale of older UK oil and gas fields to new investors. The section concluded: “This will provide further support for an industry that is a vital part of the economies of Scotland and the rest of the UK.”

PwC UK leader of industry for offshore oil and gas Alan McRae said: “The measures announced in the Budget largely confirm earlier proposals and this will be warmly welcomed by the oil and gas industry. The introduction of a transferable tax history mechanism for oil and gas companies should help facilitate the numbers of deals taking place, and help breathe new life into the sector by making it more attractive to new investors. This will help protect and create jobs, and increase investment in both the industry and local economy.

“Any move to position the UK as a global hub for decommissioning will also be welcomed, to help bring the current aspirations to reality. There is certainly appetite to examine the tax and regulatory system in its widest sense to see if there is anything that can be done to reduce costs. Anything which reduces costs is important for the government as well as business, as increased profitability for the oil companies results in higher taxes for the government.”

Earlier measures reducing tax within the industry are also beginning to bear fruit.

GlobalData senior oil & gas analyst Will Scargill noted that the UK has one of the most attractive tax set-ups for oil and gas production, offering the “lowest discounted stake take out of the top 50 producing countries”.

“Measures in the 2015 and 2016 budgets reduced the tax burden on the sector significantly. Headline tax rates were cut from 62% (or 81% for older fields) to 40% and a 62.5% investment allowance was introduced,” said Scargill.

“Although oil price rises in recent months have buoyed cash flows in the sector, the maturity of the area mean that oil and gas are more costly to extract and finds are generally smaller. Many major international oil companies have divested their UK assets. In this context an attractive fiscal regime with a stable investment climate is crucial for attracting the investment to achieve the government’s aims of maximising economic recovery.”

Finally, despite the controversy surrounding the recent decision to restart UK fracking, and subsequent seismic activity at the site, there was no mention in the Budget of banning drilling projects.

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