A step in the right direction

The immediate action required to extend the life of the North Sea has at last been recognised by the UK Chancellor of the Exchequer, George Osborne.

The changes announced in the recent Budget have been praised by some quarters as being ‘bold and a big step in the right direction’. Many in the industry have been concerned that inaction would have significant consequences, which have been obvious for some time.

Julian Small, global oil and gas tax leader at Deloitte, believes the 10% UK North Sea Corporation tax rate cut and the reduction of the Petroleum Revenue Tax rate by 15% from next year has sent a strong message of encouragement to the industry.

This means at a time of low oil prices, high costs and challenging conditions, headline North Sea marginal rates now range between 50%-67.5%, instead of 62%-81% prior to last year’s Autumn Statement. 

Small highlighted: “When added to the overall rate reductions announced, the introduction of an Investment Allowance is another positive move which will simplify the complex patchwork of existing field allowances and should improve the economics of many marginal fields.”

I agree with Alan McCrae, PwC’s head of energy tax that by offering a 62.5% uplift in CAPEX, the much-trailed Investment Allowance will be another shot in the arm for the industry, encouraging North Sea investment and replacing numerous complex allowances that had previously existed.

However, it’s crucial as McCrae has warned, that these measures aren’t seen as a tax break for oil companies, which will still face a tax rate, in some cases, of more than three times that of other sectors. This simply recognises the changing profile of the UK basin and, in the longer term, will help ensure the best return for the UK taxpayer.

The extra additional investment could be the stimulus that the industry needs - the Government’s own estimates indicate the proposed changes will reduce the tax burden by £1.3 billion over the next five years and this is expected to generate over £4 billion of investment. George Osborne has seemingly responded to the gauntlet thrown down by the industry at a time of electoral uncertainty, let’s hope after 7th May, whoever wins the UK General Election, that this positive response continues in order to push forward this stimulus in investment and halt decline.

Editor : Aaron Blutstein
Offshore Design & Engineering Equipment