With the Autumn Statement announced this week, Derek Leith, UK head of oil and gas taxation at EY, continues in the role of Energy Voice’s guest editor. Follow along each day as he spells out the challenges and triumphs the industry faces.
Regrettably, but as predicted, the Autumn Statement contained no further measures in support of the UK’s oil and gas industry.
Clearly the Government feels the package of measures contained in the March Budget is sufficient to ensure the sector is competitive from a fiscal perspective. What the Government can’t do is fix the more pressing problems facing the industry – the commodity price and the cost base.
The onus remains with industry to turn all of its energy and creative power to address these matters within its own means.
As the industry is only ever going to be a price-taker as far as the commodity price is concerned, the whole focus has to be on cost reduction and efficiency.
But there is still a place for further dialogue with the Government. There is unfinished business, and that unfinished business must be pursued.
In the area of late life assets and decommissioning, the collapse in oil price and high costs means assets that would be better exploited if they were under different ownership are being effectively prevented from changing hands.
If the seller has historic tax capacity, then they can shelter the costs of decommissioning for tax purposes; whereas the buyer in the current price scenario may not have that tax capacity and therefore cannot structure a deal that works for both parties.
The cost to the sector of such a deal not taking place may be the loss of reserves and production from the premature decommissioning of the asset.
Industry is currently seeking certainty on decommissioning relief in situations where the seller retains the decommissioning liability to ensure that such deals can take place.
Both the Oil & Gas Authority and HM Treasury have roles to play in ensuring that certainty is forthcoming, and if possible to change the current tax regime to enable some of the seller’s tax history to be transferred to the buyer, so that retention of liability isn’t the only solution to the deal impasse.
The other obvious areas for ongoing dialogue are exploration and infrastructure.
The decline in exploration is well documented, and the Government hasn’t historically appeared to be willing to adopt a Norwegian style credit system.
Other less costly solutions would be to provide investment allowance on exploration in a more expansive manner, rather than the current limitation to successful exploration.
With regards to infrastructure, it is widely recognised that prolonging the life of key assets is fundamental to achieving maximum economic recovery.
Getting some of that infrastructure into the hands of infrastructure funds is part of the solution, but tax barriers can be problematic – again areas for further dialogue.
The unfinished business isn’t limited to tax issues and policy. One of the drivers of the current cost base in Aberdeen is the lack of infrastructure including transport and superfast connectivity.
A successful City Region Deal bid will help to address these issues and support private sector investment in the new harbour and other key projects.
The City Region Deal will also be critical to Aberdeen and the Shire helping to establish itself as a centre of excellence for oil and gas technology and innovation. It will also be a material step towards anchoring the oil and gas supply chain in Aberdeen for decades beyond the exhaustion of oil and gas reserves in the UK continental shelf.
It was good to hear that Aberdeen was name-checked by the Chancellor when he mentioned City Deals that are currently under negotiation. A successful bid would be very encouraging for Aberdeen at a time when its main industry is under so much pressure.