Already plagued by declining production and technically challenging fields in the North Sea, the Scottish government has unveiled fiscal reforms it hopes will strengthen the effort underway to revive the region’s energy sector.

The proposal includes an investment allowance for fields with high development costs, a phased reversal of the increased supplementary charge implemented in 2011 and a new exploration tax credit.

“The recent fall in the oil price increases the urgency with which reforms must be progressed,” the Scottish government said in its “Oil and Gas Discussion Paper—Challenges, Opportunities and Future Policy,” released today. “The U.K. government announced limited fiscal measures in [its] ‘Autumn Statement 2014’ and outlined plans to take forward further reforms. However, it has yet to set out the detail for any further action, and the Scottish government and industry believe that fiscal reform must be implemented at the budget in March 2015.”

Scottish Energy Minister Fergus Ewing said the 2% reduction of the supplementary charge rate announced by the U.K. government in 2014 does not go far enough. The change, which lowers the rate to 30%, was among the reforms announced in Chancellor George Osborne’s autumn statement. Others included extending the ring fence expenditure supplement from six to 10 years for offshore activities and establishing a new cluster area allowance to encourage investment, including in challenging HP/HT environments.

Ewing has again called for an investment allowance, which was previously recommended by the Scottish government in 2011 and Scotland’s Oil and Gas Expert Commission in 2014.

“This will simplify the fiscal regime and potentially boost investment by between £20 billion and £37 billion [US$30 billion and US$56 billion]—supporting up to 26,000 jobs annually,” Ewing said.

Investment uplift allowance: The allowance would enable companies to lower their tax bill linked to the value of their capex. The allowance, which would be provided to companies liable for petroleum revenue tax (PRT), would apply at a rate of 35% to qualifying capex against income when calculating their liability for PRT. Specific criteria, such as qualifying expenses and specific taxes to which the allowance applies, would still have to be set.

Tax rate reduction: The paper pointed out that operating in the North Sea is not competitive internationally because of the high overall tax burden. “At present, the overall tax rate faced by North Sea operators is 80% for fields given approval prior to March 1993, and 60% for fields given approval after this date. In comparison, the headline rate of corporation tax for the rest of the economy is 20%.”

A phased reversal of the supplementary charge with a clear timetable would enhance the industry’s long-term competitiveness, according to the Scottish government. “This would reduce the overall tax rate levied on the industry to 50% for non-PRT paying fields.”

Exploration tax credit: To boost exploration, including in frontier regions such as the West of Shetland area, the proposal includes an exploration tax credit to provide fiscal incentives for companies similar to a system in Norway. “Under the Norwegian scheme producers who are not in a tax-paying position can get 78% of their exploration costs reimbursed from the state, thereby providing the same level of fiscal support as companies in a taxable position,” the paper stated.

However, the Scottish government believes the proposed fiscal reforms alone may not be enough for a turnaround.

Pointing out challenges such as aging infrastructure in maturing basins, the paper said more support may be needed to avoid the possibility of leaving assets stranded in the North Sea due to loss of key infrastructure.

In a prepared statement, Oil & Gas UK CEO Malcolm Webb said the organization hopes this exercise will complement work already underway by the industry and U.K. Treasury. He welcomed the insights and agreed to respond to the Scottish government’s request for information.

“If the treasury’s new investment allowance is to have any impact it must be implemented by Budget 2015 at the very latest. However, with the oil price now at around $50 per barrel, it is becoming increasingly apparent that this measure is not enough, and a significant reduction in the headline rate is required,” Webb said. "We are encouraged to see a growing political and industry consensus around the now pressing need for yet more fundamental and urgent changes to the tax regime.”

In an article published online Thursday by Herald Scotland, U.K. Prime Minister David Cameron said, “North Sea oil is a vital industry for the U.K. It's one of the biggest investors in our country, and we should do everything we can to help it."

He added, while referencing the 2014 Scotland independence referendum that failed, “I think it does make the case for the U.K, as we said during that referendum campaign, that North Sea oil is better off with the broad shoulders of the U.K. being able to stand behind it, because you never know whether the oil price is going to be over $100 dollars or, as it is today, around $50.”

Cameron’s words reportedly came in response to comments about the oil price drop being bad news for workers.

Contact the author, Velda Addison, at vaddison@hartenergy.com.