In yesterday’s article I set out the backdrop of a collapsing commodity price, high cost base, and tightening debt and equity markets for the oil and gas sector as the context of calls for fiscal change in the Budget tomorrow – today I explain the need for a low, simple and transparent tax rate.
As anticipated 2015 proved to be a difficult year for both oil and gas companies and the supply chain companies that make up the oilfield services sector. The average price of a barrel of Brent crude in 2015 was $52.35 dollars, less than half of the average price for the years 2011 to 2013, and a little over half the average price for 2014. The average to date for 2016 has fallen further to $30.70 per barrel, less than the average Brent price for each of the years 1979 to 1982 even in nominal terms!
Today,March 20, is apparently the international day of happiness, inaugurated by the United Nations in 2012! Does the oil and gas sector share that happiness after the end of an eventful week? The start of the week saw a clarion call from Sir Ian Wood for the Chancellor to act decisively in reforming the North sea fiscal regime. Without decisive action Sir Ian warned of job losses of up to 100, 000 as the industry continues to struggle to come to terms with the oil price slump.
As the Budget is announced this week, Derek Leith, UK head of oil and gas taxation at EY, has taken up the role of Energy Voice’s guest editor. Follow along each day as he spells out the challenges and triumphs the industry faces. Following the Chancellor’s final Budget for this Parliament much of the commentary focuses on the further welfare cuts apparently implicit in his fiscal projections. Although those of us in the North East of Scotland are interested in these matters, our more likely pre-occupation is trying to understand the likely impact of the changes to the North Sea fiscal regime. On balance, I think the changes announced yesterday were at the top end of realistic expectations of what the Chancellor might do.
As the Budget is announced this week, Derek Leith, UK head of oil and gas taxation at EY, has taken up the role of Energy Voice’s guest editor. Follow along each day as he spells out the challenges and triumphs the industry faces. At last some welcome news for the UK oil and gas industry with the Chancellor’s announcement today of a reduction in supplementary charge to 20%, the introduction of the Investment Allowance and a cut in the rate of petroleum revenue tax (PRT) from next year. The reduction in supplementary charge to the pre 2011 rate of 20% was the minimum meaningful reduction that the Chancellor could make to demonstrate that he wants to move to the new reality of taxing the sector in a manner that focuses on the macro-economic benefits to the UK economy, and not simply on maximising revenue from production taxes.
Against the backdrop of an oil price which has halved in the past year; where investment in the UKCS is forecast to fall dramatically over the next 2 years; and where exploration activity is at a worryingly low level, the pressure on the Chancellor has been mounting for the past few months. In the Autumn Statement the reduction in supplementary charge of 2% fell far short of industry hopes. However, the comments by Danny Alexander, Chief Secretary to the Treasury, the following day were more encouraging, signalling a fundamental change in policy for UK oil and gas exploitation. No longer is the focus to be on raising tax revenues but rather on the macro economic benefits of maximising the hydrocarbons extracted from the UKCS. The Budget tomorrow represents the first opportunity for the government to put this new policy into action.
Budget 2015: Guest Editor Derek Leith says the current slump provides the oil & gas sector with an opportunity to reinvent itself
Following the slide in oil price, which commenced in earnest in July 2014 and by 31 December had fallen by more than 40% in 6 months, alarm signals have been sounding loud and clear throughout the sector. Collectively industry drew a deep breath on the 1 January 2015 as it pondered what the year would bring. Could the price go lower than the $57 recorded on the 31 December and how soon would the price rebound? Well the answer to the first question has been yes, to just over $45 on January 13, and the answer to the second is anyone's guess but looks increasingly like a slow recovery with many predicting an average Brent price of $75 for 2016.
Skills shortages constraining business growth, concerns over the "great crew change", retaining talent - it's hard to miss these headlines when considering the future of the UK oil and gas industry.
The recent level of exploration activity in the UKCS is of concern, and the relatively small amount of recoverable reserves discovered offers little encouragement to those who hope to see the basin properly exploited. Thus, it is perfectly reasonable to question whether the current oil and gas tax regime is effectively encouraging exploration.
The Coalition Government's "new approach to tax policy making" promised an era in which the tax policy process would be seen as a competitive advantage of the UK.
Tax avoidance and tax evasion have become sustained banner headlines, writes Derek Leith.
Budgets come and go with monotonous regularity, and in recent years companies with UK oil and gas exploration and production activities have experienced frequent, unexpected and unwarranted tax increases.
After more than 20 months of engagement and collaboration between industry and the Government, December 11 saw a further milestone reached in the almost Herculean effort to enable decommissioning security arrangements to move to a post-tax basis.
Last month saw the UK Government issue a consultation paper outlining proposals designed to provide oil companies with clarity on the issue of the availability of decommissioning tax relief.