The oil price freefall means projections for the UK’s North Sea revenues are already out of date before the Budget is even published, according to a leading analyst.
Derek Leith, global oil and gas tax leader at accountancy firm EY, said there was “no way” the Office for Budget Responsibility (OBR) will have factored in the nosedive in the price of Brent crude in recent days.
The fiscal watchdog is preparing to publish economic forecasts after Chancellor Rishi Sunak delivers his inaugural Budget statement tomorrow.
Mr Leith said the price drop will affect projections on revenues from the North Sea, as well as how the oil price can impact the economy more generally, with the drop in fuel costs expected to benefit consumers.
He said: “On both of these, it is going to be wrong. There is no way in my mind at least that they will have factored in what has been happening over the weekend.
“There will be the tax receipts they are forecasting for the oil industry in the UK, which will be presumed on the oil price, but also the wider functioning of the economy generally, which will factor in where energy prices are at, with crude being a key component.”
However, the UK’s oil and gas tax receipts have dwindled in the years since the 2014 oil price crash so Mr Leith said this aspect is not as “material” to the wider economic picture.
More important is having a “vibrant” oil and gas industry, which is a major employer in the UK.
He added: “Whatever forecasts they have will be wrong but I wouldn’t have thought that the tax revenues they expect for the North Sea will be very material to the overall benefit (of the economy).
“Oil and Gas UK and people like myself have always tried to discuss the macroeconomic benefits of having a vibrant oil and gas industry, not just Petroleum Revenue Tax and Ring Fenced Corporation Tax.”
The OBR has been contacted for comment.
Brent dropped more than 30% at the start of trading on Monday as a result of a breakdown in supply cut talks between Russia and Saudi Arabia, coupled with concern around the coronavirus outbreak.
Since then it has rallied slightly, climbing 8.7% to $37.34 this afternoon after Moscow left the door open for further talks with the Opec cartel on output reductions. The US and Japan also pledged to take steps to tackle the economic impact of the coronavirus.
INDUSTRY ‘WONT EXPECT ANY FAVOURS’ FROM CHANCELLOR
Mr Leith said the industry “won’t be expecting any favours” from the Chancellor during the Budget, who will be “keeping his powder dry” for later in the year, once he has a clearer line of sight on the oil price, the coronavirus and UK trade deals post-Brexit.
Pressure from the climate change lobby means further tax breaks are unlikely, while there “aren’t really any fiscal levers” to help the industry in the face of a prolonged downturn in oil price.
This will put the most pressure on oilfield service firms who face another “challenging year” with just a very modest upturn in demand, Mr Leith said,
During the General Election, the Conservative Party also promised an oil and gas sector deal during this parliament.
Mr Leith said he would be “surprised” if any announcements are made on that front later, but if there are, they will be steeped in talk of the sector’s ambitions around the energy transition.
He added: “I would have thought that any sector deal is bound to have strong resonance with the Energy Transition and decarbonisation to be politically acceptable. I would be surprised if you see something like that tomorrow.
“Locally Sir Ian Wood and others have been talking about an Energy Transition Zone. If the Chancellor was to say anything particularly on the North-east of Scotland, I think it would be using that kind of language.”
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