As the Autumn Statement 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.
It is almost a year since the Autumn Statement of 2014 which announced a cut in the rate of Supplementary Charge from 32% to 30%, and I commented then that, though inconsequential in its own right, I believed it was a positive sign and that further changes were likely to be forthcoming.
The Statement also contained details of the new Cluster Allowance and an extension to Ring Fence Expenditure Supplement from 6 to 10 years.
On 4th December 2014, Danny Alexander, the then Chief Secretary to the Treasury, visited Aberdeen and announced further possible changes to the UK oil and gas tax regime.
These centred on assistance for exploration and a possible basin-wide investment allowance. There was also a commitment to have further dialogue on support for exploration, infrastructure and decommissioning.
The March budget delivered both the new Investment Allowance and a fund of £20m to support seismic activity. It went further and reduced the rate of Supplementary Charge to 20% with effect from 1 January 2015 and, unexpectedly, the rate of Petroleum Revenue Tax from 50% to 35% with effect from 1 January 2016.
Perhaps not surprisingly, having delivered a package of measures to industry in the last budget of the coalition Government, it became clear HM Treasury (HMT) saw the ball being in industry’s court.
There were no further changes in the first budget of the new Conservative Government (aside from a formal commitment to legislate for a previously announced extension to the scope of investment allowance), nor indeed are any further changes expected in the Autumn Statement on Wednesday.
Given the oil price has continued to languish in the low $40s there are many within industry frustrated by the recent lack of activity on HMT’s part. In truth HMT has turned its attention to the wider economy and the Government’s ambition to run fiscal surplus by the end of this parliamentary term of office, and the forthcoming Autumn Statement is all about spending cuts.
Moreover, the Office of Budget Responsibility fiscal sustainability report published earlier this year, if taken at face value, suggests there is very little slack with the oil and gas fiscal regime to deliver more meaningful cuts or incentives, with total North Sea receipts between 2015 and 2040 only a little over £5bn.
This provides further evidence that the sustainability of the North Sea is much more about being internationally competitive on cost and efficiency than it is about tax rates and incentives.
However, that’s not to say that there aren’t important issues that could still be addressed by HMT, and indeed the current brief review being undertaken by OGA and HMT in relation to exploration, infrastructure and late life asset transfers, is evidence that there remains an opportunity to influence policy decisions.
Of these I remain convinced that late life assets, and decommissioning in particular, remains the single most important aspect. It has long been accepted that the UKCS flourishes when we get assets into the hands of those who are willing to invest, and who can introduce new working practices which improve recovery and extend asset life.
With the current low oil price and fairly gloomy oil price outlook, decommissioning liabilities, and importantly the ability to get tax relief on future decommissioning spend, are proving to be major obstacles to asset trades.
As such we need to get reassurance that sellers who retain liability can get tax relief in the future, or find a legislative mechanism to transport tax history with the asset, or expenditure back to the Seller.
I am hopeful we will see some movement on these ‘deal-enabler’ tax changes by Budget 2016.