North Sea oil to benefit from tax cuts

North Sea oil producers will benefit from a sharp cut in taxes worth £1.3bn after the UK chancellor slashed the headline supplementary rate on profits in the Budget, a move that could give some ageing fields a new lease of life.

George Osborne responded to the plunge in crude prices and industry pleas for help by completely rolling back a tax hike he imposed in 2011, as part of a rescue package that includes a simplified investment allowance enabling companies to claim back the costs of new spending.

The move was welcomed by UK operators who complain that the increasing tax burden on the industry, where marginal rates can be as high as 80 per cent, has all but ended hopes of a reversal in the North Sea’s long-term decline.

Malcolm Webb, chief executive of industry group Oil & Gas UK, said the announcement “laid the foundations” for the regeneration of the UK North Sea. “The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness.”

The chancellor said he would reduce the supplementary charge on oil and gas companies, levied on top of a 30 per cent corporation tax rate, from 30 to 20 per cent. The change was backdated to January 1.

He also announced a long expected investment allowance which simplifies the complex system of ‘ad hoc’ arrangements for different North Sea fields that the industry says has acted as a deterrent to new spending.

The rate of petroleum revenue tax on older fields has also been reduced, from 50 to 35 per cent.

Revenue & Customs said the changes were expected to increase oil production by about 15 per cent by 2019, and encourage £4bn of investment over the next five years.

Sir Ian Wood, the Aberdeen-based oil billionaire who led a government-commissioned review on the North Sea, said the Budget measures provided “the essential lifeline” to boost confidence and attract investment.

Output on the UK continental shelf, despite record investment in recent years, has been sliding since 2000. Oil & Gas UK says that it dropped another 1 per cent last year to 1.42m barrels of oil equivalent a day, versus a peak of 4.5m boe/d 15 years ago. Exploration has all but ceased.

A fifth of production, or a third of fields, is now unprofitable, says the industry group. Cash losses, or the deficit after subtracting costs from revenues, topped £5bn last year, the biggest shortfall since the 1970s.

The chancellor’s move reflects concern in government over warnings from companies that, without action to reduce tax, investment could dry up, mature fields nearing the end of their lives could be shut earlier or abandoned, and thousands of workers could lose their jobs.

Derek Leith, head of oil and gas taxation at Ernst & Young, said Mr Osborne had taken “a significant step” towards restoring the North Sea’s competitiveness.

“While some in industry may have hoped for a more significant cut in the headline rate, there was little likelihood of that happening, particularly as the investment allowance will further reduce the effective corporate tax rate for those companies continuing to invest in the sector,” he said.

The investment allowance, which will apply across the North Sea basin, has been set at 62.5 per cent of such expenditure from April 1 and can be set off against profits subject to the supplementary tax rate.

Taking into account the impact of higher tax revenues from an anticipated increase in spending and output, the net cost to the Treasury of the package would be £1.3bn over the five years ending 2019-20, the government said.

Chris Wheaton, analyst and fund manager at Allianz Global Investors, said that many smaller operators do not pay tax anyway as they have tax losses from historic investments. “The changes announced today will not have any benefit in the short term for these companies . . . Exploration incentives should have been introduced, such as a transferable tax allowance to enable explorers to raise capital through selling tax losses.”

FT