U.K. chancellor George Osborne has announced a major overhaul of the North Sea tax regime in response to difficulties facing the oil and gas sector, although whether it is major enough remains debatable.
In his budget statement, he said Petroleum Revenue Tax would be “effectively abolished,” having cut it last year from 50% to 35%.
The existing supplementary charge for oil companies also will be cut from 20% to 10%, backdated to Jan. 1.
The budget will effectively reduce the headline rate of tax paid on U.K. oil and gas production from 50% to 67.5% to a rate of 40% across all fields.
In his budget speech, Osborne said, “The oil and gas sector employs hundreds of thousands of people in Scotland and around our country. In my budget a year ago I made major reductions in taxes, but the oil price has continued to fall so we need to act now for the long term. I am today cutting in half the supplementary charge on oil and gas from 20% to 10%, and I am effectively abolishing Petroleum Revenue Tax too—backing this key Scottish industry and supporting jobs right across Britain.”
The tax changes are expected to save the industry about $1.4 billion in the five financial years from 2016-2017 to 2020-2021.
North Sea industry group Oil and Gas UK welcomed the changes. Deirdre Michie, Oil & Gas UK’s CEO, said, “This announcement does indeed mark further progress in modernising the tax regime for an increasingly mature basin. We welcome these measures as they 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.
“We will continue to work with the Treasury to complete its ‘Driving Investment’ plan to ensure that the fiscal regime reflects the business needs of a maturing basin and signals to global investors that the U.K. is truly open for business.”
The budget also provided certainty on the availability of decommissioning tax relief, where an asset is transferred but the decommissioning liability is retained by a previous owner, which should assist the asset trading market.
Regarding exploration, Michie said the industry appreciates the continued funding of seismic and hopes that the tax rate changes prove sufficiently effective alongside the steps the Oil & Gas Authority is taking to promote exploration activity.
There also has been further adjustment to the Investment Allowance to facilitate investment in infrastructure, which also will support the drive to maximise economic recovery.
The industry has been badly affected by the drop in oil price with investment falling sharply, with nearly half of all oil fields making losses and tens of thousands of jobs lost over the past 18 months.
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