Oil & Gas UK: Tax cuts greeted, but this is just first step

December 3, 2014

Today’s announcement from the Chancellor George Osborne, that the ‘vital’ UK offshore oil and gas industry is to see an immediate reduction of two percentage points in its tax rate, has been lauded by the industry association Oil & Gas UK as “an important first step towards improving the fiscal competitiveness of the UK North Sea.”

This is the first cut in tax rates for the UK North Sea in 21 years. The industry currently pays tax on oil and gas production at special rates of between 62 and 81 per cent. The move will reduce these to 60 and 80 per cent respectively.

Oil & Gas UK has also welcomed the announcement of the extension to the ring fence expenditure supplement (RFES) and the introduction of a new allowance which aims to encourage investment in the development of high pressure, high temperature fields within cluster areas.

The association which represents the companies from the offshore oil and gas sector in the UK has said that the industry looks forward to discussing the detail of the Treasury’s proposal for further reform in the meeting with ministers in Aberdeen tomorrow.

“…these can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea.”

The industry association is also encouraged by the Treasury’s stated intention to reduce North Sea tax rates further saying that the Government needs to send a strong signal that the UK continental shelf is open for business.

Following today’s announcement, Oil & Gas UK chief executive Malcolm Webb said: “We understand the economic constraints under which today’s Autumn Statement is delivered. Therefore we take the Chancellor’s announcement of a reduction in the industry’s tax rate as an important first step to improve the fiscal competitiveness of the UK North Sea.

“Oil & Gas UK also welcomes the extension of the ring fence expenditure supplement, which will allow investors to offset their costs against future production for a period of up to ten years instead of the current six years. This move, which brings the offshore in line with onshore oil and gas production, could help attract new entrants into the basin and is just one of a range of fresh measures needed to help improve the investment outlook.”

“The Autumn Statement underlined the importance of this industry and the contribution it makes to our economy. This offers us a way forward.”

More cuts needed

“However, these can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea. We will certainly need further reductions in the overall rate of tax to ensure the long term future of the industry. Given the current crisis in exploration, we also need to see measures to promote exploration activity across the basin. HM Treasury has further proposals to discuss with the Industry tomorrow and we look forward to hearing these,” Webb said.

“The UK offshore oil and gas industry faces difficult times. Over the last three years, exploration activity has slumped, production has declined by 40 per cent and operating costs have risen by 40 per cent. We now see a $40 fall in the price of oil.

“However, with strong commitment from HM Treasury, the swift implementation of the Wood Review and industry action on cost and efficiency, we can today be a little more optimistic about the future. The Autumn Statement underlined the importance of this industry and the contribution it makes to our economy. This offers us a way forward.”