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.
Indeed the tax yield from the North Sea since the tax increase of 2011 has actually decreased dramatically – whilst there are many contributory factors the escalating cost base and high tax rates have deterred investment even when the oil price was well in excess of $100.
The Investment Allowance is also a very welcome development as it replaces all the existing field allowances and so-called brown-field allowance with a cost based, basin-wide allowance.
That provides an element of simplification to a very complicated fiscal regime, and ought to have the effect of lowering the effective corporate tax rate in the North Sea towards 30% for those companies who are investing in the sector.
The PRT reduction, certainly the least anticipated measure, will also be especially well received by the very mature North Sea fields who have been suffering a marginal tax rate of 81% despite falling production and rising integrity costs.
These fields support most of the UKCS pipeline infrastructure and a lowering of the PRT rate, along with the Investment Allowance and the cut in supplementary charge will be a much needed boost.
Of course there will be sections of industry who are disappointed. These will include explorers who will see the after-tax returns of successful exploration increase but no downside protection when they are unsuccessful, and no Norwegian-like tax credit regime which would provide them the opportunity to borrow to fund exploration.
Explorers will have to wait for the promised consultation on exploration to see whether any support for exploration is forthcoming, and realistically such support may not materialise before Budget 2016.
That said, in the round, these announcements are good news for the UK oil sector. More work is required by industry and the supply chain to reduce the cost base so that the exploitation of North Sea and Atlantic Margin fields remains commercially attractive, and is capable of attracting investment capital.
Nevertheless, the government has taken a big step towards creating a fiscal regime that is the correct regime for the long term exploitation of the UK’s natural resources. Let’s hope that industry, HMT and the new regulator can work together over the remainder of the year to build momentum for further change and increased competitiveness.
For more analysis on the budget, click here.