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.
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.
We will almost certainly see the introduction of the heralded Investment Allowance. This new basin-wide offshore allowance will replace all of the existing field allowances (but not the Cluster Allowance announced in the Autumn Statement).
The new allowance will be given as a percentage, almost certainly 62.5%, of capital expenditure and be available to offset supplementary charge once the allowance is activated. Activation will simply be by production or tariff revenues from the asset invested in.
The Investment Allowance in itself is not enough though, the tax rate also needs to be reduced. The time is right to completely reverse the increase of 2011 and reduce the corporate tax rate to 50%.
That will be a change that investors understand and which will send a strong signal that the UK’s oil and gas fiscal policy is heading in the right direction and further reductions in rate can be expected.
In terms of affordability to the Exchequer, today’s EY Item Club report attributes a 0.5% boost in UK economy’s forecast growth rate to the beneficial impact that the lower oil price has on the economy as a whole.
Those likely to be most disappointed by the Budget are the companies who expected to see some support for exploration. The Investment Allowance offers some help but only where the exploration is successful as it needs to give rise to revenue before the Allowance can be activated.
The fundamental reforms required for the North Sea Fiscal Regime will remain a work in progress following tomorrow’s Budget and will need to be one of the many priorities of the new government after the general election.