Scotland calls for urgent oil & gas tax reforms

Scottish Energy Minister Fergus Ewing yesterday published a new report calling for urgent reform of the taxation regime for North Sea oil and gas and also setting out the Scottish Government’s work to support the sector.

The report proposes fiscal changes to support investment, encourage exploration and ensure that the North Sea is a competitive investment location.

The three key proposals are:

  • An investment allowance to provide support for fields that incur higher costs to develop;
  • A phased and timetabled reversal of the increase in the Supplementary Charge implemented by the UK Government in 2011; and
  • Introduction of an exploration tax credit to help increase levels of exploration and sustain future production.

According to the report, in recent years, investment in the North Sea has become more concentrated in technically challenging fields, which can incur higher capital costs to develop. These fields can struggle to be commercially viable at the current headline tax rates.

This is further compounded by the impact from the recent drop in crude oil price. A general Investment Allowance would provide additional support for such fields and help to sustain future investment. Analysis by Professor Alex Kemp suggests that such an allowance could increase investment by £20-£36 billion over the period to 2050 and in turn boost production by 1.2-2.2 billion barrels of oil equivalent. The report says that this would have significant benefits for the wider economy.

Fergus Ewing: “Our proposed fiscal changes will not only boost the economy but analysis based on industry data shows that they will support thousands of jobs.” 

Scottish Government estimates suggest that it could support between 14,000 and 26,000 jobs per year across the UK, a substantial proportion being based in Scotland.

Ewing said: “The oil and gas industry is a strong success story for Scotland and will continue to be. However, because of the mismanagement of oil and gas fiscal policy by the UK Government, challenges remain and we must tackle the on-going cost pressures and the fall in oil prices head on.

“That is why today the Scottish Government is publishing a report setting out a range of taxation changes and we will now consult closely with industry on these proposals.

“Our proposed fiscal changes will not only boost the economy but analysis based on industry data shows that they will support thousands of jobs.

Investment Boost

Ewing added:“We are calling for an investment allowance – as recommended previously by the Scottish Government in 2011 and Scotland’s Oil and Gas Expert Commission last year. This will simplify the fiscal regime and potentially boost investment by between £20 billion and £37 billion – supporting up to 26,000 jobs annually.

“Last year the UK Government announced a 2 per cent reduction of the Supplementary Charge rate – this reduction doesn’t go far enough. We are calling on the UK Government to provide a clear timetable to fully reverse the increase brought in in 2011. That will provide a strong signal for investors that the North Sea is open for business.

“After years of using the North Sea as a cash cow the UK Government must finally and urgently take substantive action. We believe there is a long term sustainable future for the North Sea and we are committed to using every lever at our disposal. It is time for the UK Government to follow suit.”

Malcolm Webb: “Sharply falling oil prices are now adding to the significant challenges the UK offshore oil and gas industry was already facing.”

The Scottish Government’s report says that a high tax burden currently faced by the sector is damaging its international competitiveness. A phased reversal of the increase in the Supplementary Charge implemented by the UK Government in 2011, accompanied by a clear timetable with a defined end date, would significantly enhance the industry’s long term competitiveness, the report says. Furthermore, the report cites an analysis by Professor Kemp which suggests that a Supplementary Charge reduction could increase investment by around £7 billion over the period to 2050. Scottish Government analysis  suggests that such a move could support up-to 5,600 jobs per year across the UK, a  significant proportion of which would be in Scotland.

Pressing need for change

Malcolm Webb, Oil & Gas UK’s chief executive, responded to the Scottish Government’s announcement regarding the UK oil and gas tax regime, saying:  “Sharply falling oil prices are now adding to the significant challenges the UK offshore oil and gas industry was already facing. The current tax regime is one such challenge and a key factor for companies making decisions on investment and activity. All helpful insights on that issue are welcome, so we will certainly respond to the Scottish Government’s request for views and information.

“We would hope this exercise will complement the crucial work already well underway between the UK Treasury and the industry to make urgent changes to the UKCS tax regime in order to both sustain and encourage further investment. If the Treasury’s new Investment Allowance is to have any impact it must be implemented by Budget 2015 at the very latest. However, with the oil price now at around $50 per barrel, it is becoming increasingly apparent that this measure is not enough and a significant reduction in the headline rate is required.

We are encouraged to see a growing political and industry consensus around the now pressing need for yet more fundamental and urgent changes to the tax regime. Oil & Gas UK is committed to playing a fully engaged and constructive part in this important process of reform and looks forward to working with both the UK and Scottish governments and all other stakeholders to that end.

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