Report: Challenging economics loom over UK oil & gas tax cuts’ effects

The effects of tax cuts on the UK oil and gas industry announced in the Budget for 2016 “will vary significantly” across company portfolios, a report by GlobalData, a provider of data and analysis, has revealed. 

The Budget will reduce the headline rate of tax paid on UK oil and gas production from 50 percent, or 67.5 percent for older fields, to a rate of 40 per cent.

These measures were welcomed by both Oil & Gas UK, representing the oil and gas players in the UK, and UK’s Oil & Gas Authority (OGA).

According to GlobalData’s report, these tax cuts could result in a value increase of up to 20% for new developments, and up to 70% for mature fields.

However, GlobalData said, with many fields already not taxable due to the low oil price, the effects will vary significantly across company portfolios.

The reductions, larger than anticipated, reduced the level of state take on all UK projects, although they were biased toward older, existing assets, GlobalData said.

The Petroleum Revenue Tax (PRT), applicable only to projects given development consent before March 1993, was permanently reduced to 0%; the government zeroed this tax expressly to benefit older fields and infrastructure.

As platforms and other offshore infrastructure age and require maintenance, the government is keen to optimize their utilization before they are mothballed and effectively strand otherwise recoverable offshore reserves.

Additionally, GlobalData said, all fields will benefit from the halving of the Supplementary Charge from 20–10%, for which existing capital expenditure allowances for this tax remain unchanged. Both tax changes are effective retroactively from January 1, 2016.

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