Earlier this month, Norway announced it had suffered its first quarterly budget deficit in 20 years.
Many factors will have contributed to the overall NOK 5bn deficit during the second quarter of 2016, but one of the most significant reasons the Norwegian government ended up spending more than the income it generated was the falling tax take from oil and gas production.
Tax receipts from the sector have fallen by half. That’s a remarkable drop from NOK 46bn in the second quarter of 2015 to some NOK 23bn in the second quarter of 2016.
Of course even £2bn of tax revenues from oil and gas production, in one quarter alone, is substantially more than the UK equivalent.
In the year to March 2016, the total UK tax take (including corporation tax, supplementary charge and petroleum revenue tax) amounted to around £35m.
Are there any lessons that the North Sea and the UK government can learn?
The North Sea is in a more mature phase, and so the direct financial comparison is not particularly meaningful. However, what both governments have in common is the challenge of making the most of their remaining resources at a time when oil prices are low, costs are high (albeit reducing), and capital budgets are being slashed.
The two tax systems face the age old challenge of capturing a fair economic rent from the exploitation of national assets, while at the same time encouraging further investment. The UK government, in particular, is increasingly cognisant of the need to consider the contribution of the oil and gas sector to the economy as more than just production taxes.
Obviously the corporate tax take from the UKCS has traditionally been a key component of that contribution. However, continuing upstream investment is of value for a number of other reasons.
The UK supply chain is a key exporter of services to other oil and gas regions, and an enduring UK upstream sector is critical to retaining that supply chain presence within the UK.
Add the other, non-corporate taxes that are contributed by both the upstream sector and the supply chain, such as employment taxes, and there are compelling reasons to look wider than corporate tax take as a measure of the economic value of the UK oil and gas industry.
With the UK Government having reduced tax rates applying to North Sea profits quite substantially over recent years (corporation tax and supplementary charge reduced to a combined 40%, with petroleum revenue tax reduced to 0%), will we see further changes in the forthcoming Autumn Statement?
The respected economist, Professor Alex Kemp, recently released a study into the current state of the UK oil and gas industry, with a particular focus on the levers available to Government to encourage new investment.
With new UK discoveries becoming ever more marginal, both in size and in economics, the study notes there is a case for reducing the rate of corporation tax further; even after recent reductions, the North Sea corporation tax rate remains substantially above the mainstream UK corporation tax rate.
However, reducing tax rates is only one of the tools available to Government to encourage activity and it must be recognised that, with many companies making losses as a result of the low oil price, further reductions in the corporate tax rate would not necessarily lead directly to a material effect on investment.
Nonetheless attracting new capital must be at the forefront of Government’s thinking in relation to the future of the North Sea, and the Government needs to take whatever actions are necessary to ensure the tax regime is consistent with that objective.
This may take the form of some more targeted changes to the North Sea tax regime that ensure asset transactions are not inhibited by significant tax-driven value gaps between Buyer and Seller.
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