Will the Chancellor’s tax cuts be enough?

In yesterday’s Budget Statement, the Chancellor announced further changes to the North Sea tax regime, cutting the Supplementary Charge (SCT) from 20% to 10% and “effectively abolishing” the Petroleum Revenue Tax (PRT). The Budget also confirmed an additional £20 million for a second round of seismic surveys and included a pledge to provide certainty that companies would be able to access tax relief on their costs when they retain decommissioning liabilities for an asset after a sale. The Government committed to building on the new decommissioning powers of the Oil and Gas Authority (OGA) by undertaking further work to reduce overall costs and committed to explore further whether decommissioning tax relief could better encourage transfers of late-life assets.

Oil and Gas UK welcomed the measures and said the changes “will build on the industry’s achievements in improving efficiency in the face of low oil prices, boosting the sector’s competitiveness and helping to restore investor confidence”. The measures introduced would reduce the headline rate of tax paid on oil and gas production from 50% – 67.5%, depending on the age of the field, to 40% across the board. However, other industry stakeholders and opposition politicians believe the Chancellor could have done more to help the industry, and that the announced measures do not go far enough.

Earlier this week, Professor Alex Kemp and Linda Stephen of the University of Aberdeen released their new study titled “Field Development Tax Incentives for the UK Continental Shelf (UKCS)”. The study looked at a number of new oil and gas fields in the main regions of the UKCS under a range of oil and gas prices and tax scenarios to identify the impact of changes to fiscal regime.  The study recommended the following changes to stimulate the oil and gas industry in the North Sea:

• A reduction in Corporation Tax.
• The Investment Allowance (IA) to be able to be activated against a different project’s income to provide earlier effective relief.
• Interest on unused IA; for instance, from the time when the IA can be activated but cannot be used because of insufficient income to absorb the allowance.

The study suggested that the introduction of these measures, along with the announced reduction in Supplementary Charge, could have a significant positive effect on investment in marginal fields.

Following the Budget, Energy Voice said that Professor Kemp welcomed the Chancellor’s tax package, particularly the abolition of the PRT. However, he stated that the reduction in the SCT could reduce the tax incentives for oil and gas firms to proceed with development of marginal fields in the North Sea.

Professor Kemp’s study shows that the measured announced are unlikely to be sufficient to incentivise marginal field development alone and further measures such as increased allowances may be required. However, it remains clear that marginal fields will not become economic through tax cuts but through the application of low cost solutions.