Double digit tax cut needed
UK offshore industry trade association Oil & Gas UK has called for “urgent action” to reduce and simplify North Sea oil and gas taxation, including a double digit reduction in the Supplementary Corporation Tax on UK producers.
The trade body, led by outcoming CEO Malcolm Webb, said the right action could result in additional investment in the North Sea.
Oil & Gas UK’s plea comes just days ahead of the UK Government’s 2015 budget, which is widely expected to contain the results of a fiscal review of the North Sea’s taxation regime, long seen by many to be over complex and setting rates too high in what is now a mature basin. The review was called for in the Wood Review, itself commissioned in the wake of plummeting production, exploration and production efficiency rates on the UK Continental Shelf – well before oil prices fell from US$110 to $50/bbl.
Webb said: “A double-digit reduction in the Supplementary Corporation Tax charge, plus a single simplified Investment Allowance, is urgently needed in order to help re-establish the competitiveness of the UK oil and gas industry.”
However, while few disagree that urgent reform to the fiscal system is required, other priority areas have been highlighted. Andy Samuel, CEO of the newly created Oil and Gas Authority – the new UKCS regulator, created on the back of the Wood Review – said leadership, further actions from the Wood Review and efforts to address costs and efficiency would also be needed.
Webb, who is due to be replaced by former Shell exec Deirdre Michie as CEO on May 1, added: “Last year, after taxation, this industry suffered a negative cash flow of £5.8 billion. The UK North Sea sector is paying the price for having become a high cost, high tax and poorly regulated region. We urgently need to improve our cost base, reduce the tax burden and improve the stewardship of the basin. Fortunately, we know what needs to be done on each of these matters in order to correct the situation.
“Industry is now working flat out to improve its cost efficiency and a wide range of activity is underway throughout the sector. Both industry and Government have accepted all of the recommendations for regulatory reform contained in the Wood Report. However, significant investment is also required alongside action on costs and regulation. A clear signal must be sent out that the UK tax regime has been restructured in order to attract and sustain much needed investment for the long term. International investors must be encouraged to persevere with the UK. The current complexity and high (60-80%) rates of taxation provide no such encouragement.”
Unsanctioned projects currently competing for investment on the UK Continental Shelf (UKCS) total £25 billion, according to Oil & Gas UK. “If industry works on its cost base, and the Chancellor delivers a more competitive tax regime, some £4-5 billion of these projects could be sanctioned in the near term,” said the body.
Oil & Gas UK’s Activity Survey 2015 revealed that in 2018, half of UKCS production will come from fields which did not exist two years ago. Oil & Gas UK says this further underlines the urgent need to keep exploring to replenish reserves whilst at the same time making the most of existing fields.
