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Budget 2016: OBR figures predict revenues from oil and gas to be negative for next five years

Oil prices
Oil prices

Revenues from UK oil and gas are expected to be negative for the next five years, according to the Office for Budget Responsibility’s forecast.

In its independent fiscal outlook that accompanied the Budget, the body said the industry would likely continue to struggle – even with the tax breaks announced by the chancellor.

George Osborne scrapped the petroleum revenue tax (PRT) and halved the supplementary charge – measures worth £1billion according to Treasury figures.

But the OBR forecast suggested the changes would have minimal impact to the sector in the current downturn and said it had assumed “only a modest behavioural response”.

It also predicted the low oil and gas price environment would make it “difficult for projects to clear investment hurdles”, adding: “This is likely to be the case even with the lower tax
rates.”

UK oil and gas revenues are expected to be minus £10million in 2015/16, down from £2.2billion in 2014/15 and almost £11billion as recently as 2011/12.

The OBR expects receipts to be negative throughout the forecast period, which runs until 2020/21.

A key element of the downward revision in revenues since the November forecast is the further drop in oil and gas prices.

They are projected using future prices for the first two years and then held flat in nominal terms.

This leaves them $18 a barrel lower in 2015 and $15 a barrel lower in the medium term than in the OBR’s November forecast.

Gas prices are expected to be 9.2p a therm lower in 2016 and then nearly 8p a therm lower over the rest of the forecast, according to the OBR.

In terms of oil production, the OBR predicts the rise seen in 2015 to continue in the near term.

It also expects higher capital expenditure in the near term, in light of the plans already sanctioned by the Oil and Gas Authority, but has reduced the forecast towards the end of the forecast period.

A further decline in the profitability of the sector is expected in 2016/17 with many firms making losses, according to the OBR.

In line with that, payments of offshore corporation tax and PRT are likely to be “dwarfed” by repayments relating to decommissioning costs.

The OBR also said its forecast remains “subject to significant uncertainty”, particularly the extent to which much lower oil and gas prices will affect production and expenditure.

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