OGUK: Tax change vital step to unlock new investment in North Sea

UK’s oil and gas industry has welcomed the government’s commitment to introduce a tax measure that will unlock further investment in the UK North Sea by enabling more assets to change hands and allow new owners to provide fresh investment in many mature oil and gas fields.

The Chancellor Philip Hammond announced on Wednesday that the government would introduce ‘Transferable Tax History’ for transfers of oil and gas fields in the North Sea.

This will allow companies selling North Sea oil and gas fields to transfer some of their tax payment history to the buyers of those fields. The buyers will then be able to set the costs of decommissioning the fields at the end of their lives against the transferable tax history.

Believing that the measure could save the UK taxpayer millions of pounds by deferring the decommissioning of mature oil and gas fields, Oil & Gas UK, a trade association for the UK offshore oil and gas industry, has been working with HM Treasury for a number of years on measures to help further unlock asset trading in the UK North Sea and generate additional tax revenues.

It will also help extend the lives of many mature fields and postpone decommissioning.

Commenting on the announcement on Wednesday, Deirdre Michie, Chief Executive of Oil & Gas UK, said: “We very much welcome the Chancellor’s action to enable the implementation of transferable tax history. This is a vital step that can bring in new investment to increase recovery from existing fields and fund fresh investment which is key to generating activity for our hard-pressed supply chain. It will also help extend the lives of many mature fields and postpone decommissioning.

“While there have been a number of deal announcements in the basin over the last year, these have mostly been for less mature assets, have been extremely complicated and taken a very long time to negotiate. This tax measure should help complete deals more quickly and in a more efficient way.

“Prolonging the life of mature assets better allows the industry to deploy its skills and technology to maximize extraction of the UK’s oil and gas, increasing production tax revenues to the Exchequer and securing highly-skilled jobs.

“We note the measure is intended to be effective by November 2018 and are committed to work closely with Treasury to ensure the change delivers the intended outcome.”

According to the trade body, currently existing owners of oil and gas fields are unable to pass their tax history onto a buyer. This means the buyer perceives the field to be less attractive commercially, partly because they are unlikely to be able to access the same level of tax relief than the current owner when decommissioning.

Enabling the transfer of tax history allows the purchaser to value the asset on a similar basis to the vendor and removes a significant barrier to asset trading. Transferable tax history will not permit the purchaser to gain greater tax relief than the vendor and will be at no net cost to the Exchequer.

Michie further added: “We also welcome the Chancellor’s recommitment to the fiscal plan Driving Investment, a key request from Oil & Gas UK as it provides confidence for investors that the UKCS is a competitive basin in which to do business.”

Oil & Gas UK also noted that Treasury had announced a technical consultation on petroleum revenue tax deductions for decommissioning and, additionally, are providing clarification on how tariff income is treated within the ring-fenced corporation tax regime. The trade body said it would work closely with its members and Treasury to ensure that these measures will help maximize economic recovery from the basin.

UK’s Oil & Gas Authority (OGA) also welcomed the announcement at the Autumn Budget that the government intends to introduce transferable tax history to give companies buying UK oil and gas assets certainty that they will be able to obtain tax relief for decommissioning the field at the end of its life.

“This move underlines the government’s continued support for the oil and gas sector, building on improvements to the fiscal regime announced at previous Budgets and the £5 million funding for exploration announced in September 2017. All of this sends a clear message to investors that the UK is open for business,” the OGA said.

‘Providing comfort to new entrants’

Bob Ruddiman, Head of Oil and Gas at legal firm Pinsent Masons, also welcomed Chancellor Philip Hammond’s Budget concessions on Transferable Tax Histories for North Sea oil and gas operators.

He said it was a result of a productive dialogue between the major Operators, “entrepreneurial new entrants” industry bodies, oil and gas professionals and HM Treasury over the last two years.

He said: “This is what the industry has been seeking throughout consultations in 2016 and in a working group which was set up to explore the transferability of tax history.

“In recent months there has been a significant increase in the sale and acquisition of North Sea assets. This new legislation will allow transferrable tax histories to act as an incentive which encourages fresh investment in the basin by providing comfort for new entrants who have no previous tax history.

North Sea oil and gas has an important contribution to make in a post-Brexit landscape.

“This signals that there is a greater commitment to extracting the North Sea’s estimated 20m barrels of oil reserves, even if the huge tax yields of yesteryear are no longer achievable because of the lower price of Brent Crude. Whilst the energy mix is changing, with a variety of fuel sources contributing to security of supply, North Sea oil and gas has an important contribution to make in a post-Brexit landscape.

“With continued constructive Government liaison, the North Sea has a viable future which creates jobs and wealth, develops people skills, promotes our world-leading technologies and improves our energy security of supply.

“The Budget proposals are entirely appropriate in supporting an industry which has suffered significantly from the global economic downturn and they will be welcomed by E&P companies, oilfield services and providers of debt and equity.”

Derek Leith, Ernst & Young’s Head of Oil and Gas Tax, commented: “The proposed changes, the details of which will be worked through in 2018, have the potential to revitalize the UK oil and gas industry.”

Leith also added: “New investment in the UKCS is the lifeblood to preserving an industry which has made a huge contribution to the UK’s economy over many decades, and supporting a supply chain focused on innovation and internationalization.”

Scotland “short changed”

While the oil and gas industry has welcomed the announcement promising the new tax measure, not everyone was satisfied with the budget announcement.

Commenting on the UK Government budget, Finance Secretary Derek Mackay said on Wednesday that Scotland was being “short changed”.

Mackay stated: “Ending the VAT obligation on police and fire services and supporting the oil and gas industry is welcome, but in both cases these moves are well overdue, and the UK Government must now pay back the £140m of VAT they have already taken.

“The reality of today’s budget is that Scotland continues to be hit by UK austerity and the decision to leave the EU. Compared with the £1bn awarded to the DUP, the funding settlement for Scotland unveiled today is disappointing.

“I have consistently argued for a better settlement for Scotland, and this budget does not reflect that.”

Offshore Energy Today Staff