Oil & Gas UK has warned that the UK oil and gas sector needs urgent tax reform in the forthcoming Budget to boost the industry’s competitiveness and investors’ confidence in the UK continental shelf (UKCS).
The calls for changes in tax follow the trade association’s recent publication of new forecasts which show that in the current price and business environment, more than one billion barrels of oil and gas are no longer considered economically viable to extract. A minimum tax of 50 percent on production profits is currently imposed on the sector, although Oil & Gas UK’s Economics Director Mike Tholen believes this figure can be significantly reduced.
Commenting in an Oil & Gas UK statement, Tholen said:
“The industry currently pays 50 percent tax on production profits – or 67.5 percent for older fields – and we are calling for a permanent cut of 20 percentage points and the removal of Petroleum Revenue Tax. These rate changes, coupled with the existing first year capital allowances, are strongly aligned with HM Treasury’s “Driving Investment” plan for fiscal reform. The incentivizing effect on investment and production in the long-term should render it of minimal cost to Government.
“Unlocking the late-life asset market is vital in maximizing the UK’s oil and gas recovery as asset transfers extend the life of important hub assets and defer cessation of production. This can be achieved through measures such as enabling decommissioning tax relief to transfer with the sale of an asset and ensuring tax relief can be accessed by the vendor where they retain the decommissioning liability, all at no cost to the Government.”
Tholen also stated that exploration is suffering as a result of special taxes and urged their removal in order to generate “fresh investment” in the sector:
“Exploration, which currently sits at an all-time low, should be encouraged by permanent removal of special taxes from discoveries made over the next five years. Improving the effectiveness of the Investment Allowance for assets already discovered would stimulate activity in the short term and attract fresh investment.”
The Oil & Gas UK Economics Director even suggested that the government should help companies sinking deeper into the red in the region through specialized loan schemes:
“Financial difficulties faced by operators and contractors alike during this severe downturn, which are in some cases threatening the continued viability of companies risking jobs and future innovation, could be eased with the introduction of a Government-backed Loan Guarantee scheme.”
Emphasizing the importance of attracting new investment within the UKCS, Tholen stated:
“To bridge the gap between the 6.3 billion barrels of oil and gas on the UKCS in which investment is already approved and the 20 billion that we estimate are out there, we must fight fiercely to attract global capital. That requires us to be attractive in cost, technology and fiscal terms and this year’s Budget presents the perfect opportunity for the Government to signal to investors its long-term ambition for the sector.”
The trade association’s call for tax reform follows the launch of an exploration license competition by the Oil and Gas Authority late Monday, which aims to stimulate further offshore oil and gas exploration activity in UKCS.
The £500,000 ($710,000) competition has been designed to encourage geoscientists and engineers to develop “innovative” products potentially using the data acquired during last year’s £20 million ($28 million) Government-funded seismic surveys of the Rockall Basin and Mid North Sea High (MNSH) areas. Successful applicants may be awarded up to £30,000 ($42,000) ‘seed funding’ to carry out initial analysis, with the two winning candidates potentially securing around £100,000 ($142,000) to develop their work into a final product for use by the OGA.
Commenting on the competition, an OGA statement read:
“It is hoped the competition will not only significantly increase the understanding of these frontier areas in respect of the 29th Seaward Licensing Round later in the year, but also retain talent in the oil and gas community which has been affected by the oil and gas industry downturn.”