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Budget benefits are a step in the right direction

Budget benefits are a step in the right direction
The new measures for oil and gas not only represent a reversal of the acknowledged “faux pas” in last year’s budget but also recognise the contribution the industry can and is making to the UK’s economic growth.

The new measures for oil and gas not only represent a reversal of the acknowledged “faux pas” in last year’s budget but also recognise the contribution the industry can and is making to the UK’s economic growth.

Credit must be given to Malcolm Webb and his team at Oil & Gas UK who have been lobbying the Treasury for the last year and have obviously got them to understand what needs to be done to make the most of the UK oil and gas industry both for its participants and for UK plc.

The measures introduced are:

  • New field tax allowance for deepwater fields West of Shetland and a wider range of fields
  • Tax relief certainty on decommissioning costs
  • An allowance for new investment in existing fields

This package of benefits is just what was needed to kick start a range of developments that otherwise were stalled, but the devil is in the detail and it will be interesting to see the actual legislation.

Looking forward, my hope is that this is the first step towards establishing a coherent long-term strategy that the industry can have confidence in.

By introducing these measures, Osborne has made amends for his surprise tax raid on the oil industry this time last year. Hopefully, he will go a stage further by recognising the potential that the oil and gas industry has to play in contributing to the growth in the UK economy.

In the US, President Obama is happy to take credit for the resurgence in the US oil industry that has come from new drilling techniques, including fracking. This is turning the US into the fastest growing oil producer in the world and will boost US economic growth by 2% by 2020.

While the impact of the measures concerning West of Shetland may be longer term, the allowance for new investment in existing fields and a wider range of fields benefiting from new tax allowances should deliver more immediate gains.

West of Shetland activity will be largely determined by the phasing of the multi-year projects and the availability of deepwater rigs. The longevity of these projects coupled with the current shortage of deepwater rigs will mean that the impact will not be felt for a few years.

The wider range of fields getting more tax allowance will stimulate asset transfers with more investors buying into existing fields in the North Sea and further development of more marginal fields.  This, coupled with the current high oil price, should lead to much higher levels of investment and increased activity in the North Sea.

Meanwhile certainty around decommissioning will help prolong the life of North Sea and lead to further investment in ageing assets. This may cause concern for those gearing up to capitalise on decommissioning activity but it is a case of short-term pain for long-term gain.

 

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