Tax reform crucial to salvage UK oil and gas production

Posted on 9 Mar 2016 by Victoria Fitzgerald

Oil & Gas UK has set out its proposals for tax changes in the forthcoming Budget to boost the industry’s competitiveness and investors’ confidence in the UK continental shelf (UKCS).

The calls for urgent tax reform follow the trade association’s recent publication of new forecasts which show that in the current price and business environment, more than 1 billion barrels of oil and gas are no longer considered economically viable to extract.

Mike Tholen, Oil & Gas UK’s economics director, commented: “In such a mature basin like the UKCS where special attention and expenditure must be directed at maintaining the integrity of oil and gas infrastructure, we know that strong and sustained investment does translate into higher production.

the oil and gas sector has historically managed obsolescence in reactive mode, but times have changed.
More than 1 billion barrels of oil and gas are no longer considered economically viable to extract.

“The 10% increase in production in 2015, confirmed last month by the Oil and Gas Authority, is a direct result of significant annual capital expenditure in the five years to 2014.”

Tholen continued: “With investment approvals likely to fall to less than £1 bn this year from a typical £8 bn annually over the last five years, there is a real risk that fields due to cease production in the next five years will simply not be replaced by new projects.

“Lost production puts at risk hundreds of thousands of skilled jobs, billions of pounds of tax revenues and the UK’s energy security. As a result, domestic oil and gas production is forecast to decline sharply beyond the end of this decade.”

The UK oil and gas sector is fighting hard for its survival and in a bid to restore competitiveness, expects to have improved efficiency and its average unit operating cost by more than 40% compared with two years ago.

This robust industry response needs to be accompanied by substantive tax reform to drive activity and send a powerful signal to global investors that the UK is open for business.

Tholen highlighted: “The industry currently pays 50% tax on production profits – or 67.5% for older fields – and we are calling for a permanent cut of 20 percentage points and the removal of Petroleum Revenue Tax.

GE is investing in a new subsea centre in Bristol, creating 200 jobs
Unlocking the late-life asset market is vital in maximising the UK’s oil and gas recovery.

“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 incentivising 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 maximising 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.

“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.

“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.”

Tholen concluded: “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.”