It looks as if the London Government’s Treasury has a fiscal plan that might work for the UK Continental Shelf and the industry appears broadly receptive.
But there were multiple warnings issued to Treasury chief secretary Danny Alexander in Aberdeen that time is running out and that he must deliver concrete measures by the Government’s Spring Budget.
Indeed, this urgency is made all the more acute by the revelations that Opec swing producer Saudi Arabia is now apparently content to let the oil price drop to around $60 a barrel and that it be a long, rough ride for everyone.
The gathering of industry leaders and media at Oil & Gas UK’s offices to listen to Alexander and Tory colleague Priti Patel (exchequer secretary) was large.
I sensed a suppressed tension in the room … a frustrated politeness that was never going to be allowed to turn to anger after the pitiful Autumn Statement tax cut.
If anyone was looking for further clear announcements on tax changes, and I’m sure there were, then that is what they did not get.
The 2% reduction is supplementary charge handed out by chancellor Osbourne was as far as it went. Instead, there is the “ambition of reducing the rate further in future in a staged and affordable way”.
Really? What exactly does that mean? Alexander waffled on about the current state of the British economy as being the determinant of what actually happens. But what about the parlous state of much of the North Sea? This golden goose that’s looking pretty miserable just now.
That said, Andy Samuel, newly appointed CEO of the brand new Oil & Gas Authority, did welcome the plan but reiterated a warning issued minutes earlier by Mike Tholen of Oil & Gas UK that there were people in the room who remain worried about the time being taken to effect necessary changes.
Alexander was clearly out to assure an industry that he has in the past antagonised that he really had been listening.
“The days of the government regarding the North Sea primarily as a means of raising revenue are over,” he assured. “You are first and foremost a vitally important economic asset, etc, etc.
A quick flick through the plan revealed a puzzle or two; at least to me.
At one point is states: “The fundamentals of the fiscal regime remain sound, but now is the time for significant change.”
If they are that good, why the significant changes now on the table?
I asked about the future of that hangover from decades gone by … Petroleum Revenue Tax, something that Oil & Gas UK CEO Malcolm Webb wants abolished.
The reply was that it is being held under review but that reducing supplementary charge is the focus.
But then we were told that reductions had to be “affordable”.
Yesterday, we learned that the $75 price trigger points for supplementary charge had been conveniently abolished just at the point where, in another 2.5 months, if present price levels were maintained, Treasury would have been obliged to drop the supplementary charge back down to 20% from 32%. This is far more than the 2% that is being implemented.
Alexander responded by rambling on about fuel duty and that there would be a need to increase it should the supplementary charge be reduced in line with the original pledge.
He told his oiler audience: “What we made clear yesterday is that we’re not going to increase fuel duty. As a Highland MP for whose constituents a car is a necessity and not a luxury I’m not going to get into that.”
May I on behalf of at least some in the room remind the chief secretary that there are many people in the Highlands who rely upon offshore jobs to keep the roof over their head. Which is more important? Car or roof?
Having perhaps belaboured the point about supplementary charge and PRT, it is time to shift to other aspects of the Treasury offerings.
Picking through the highlights:
- the introduction of a basin-wide ‘Investment Allowance’ to reduce the effective tax rate further for those companies investing in the future of the UKCS with a consultation will be published in early 2015
This is a hugely important measure … potentially very valuable as a means of sustaining investment and commitment by oil and gas companies; and it will apparently also help simplify the bewildering rag-bag of allowances that have mushroomed since 2011’s Alexander / Osbourne tax grab.
- An immediate extension of the ring fence expenditure supplement from six to ten accounting periods to ensure companies already investing in the UCKS are given every support to continue.
It’s a modest measure but which in theory could help smaller companies, many of which are struggling; even more so with current and anticipated oil prices.
- Financial support for seismic surveys in under-explored areas of the UKCS, working with industry on options for shared funding models. Details will be set out at Budget 2015.
Yes! This is good and seems to draw at least to some extend from Norwegian practice. There is a serious need to upgrade seismic coverage of the UKCS and there are huge gaps.
- Further work on options for supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable.
There we go again; that word “affordable”. Let me turn this around. Government cannot afford to let exploration plummet the way it has been. And so, if options on the table include Norwegian-style exploration drilling allowances then that would surely be a valuable step in the right direction.
- development of options to improve access to decommissioning tax relief and work with the OGA to consider options for reforming the fiscal treatment of infrastructure, with further consultation with industry in 2015
This is incredibly important and sensible, given the many problems associated with what can only be described as a vexed issue at every level … from majors right down to oil minnows.
I asked industry doyen, Sir Ian Wood, who was responsible for leading the Wood Review commissioned by government, what he thought of “Driving investment: a plan to reform the oil and gas fiscal regime”.
He replied that it was the first time that he could recall when two UK Treasury ministers had sat in front of the North Sea leadership in Aberdeen.
“That to me seems to confirm that we do have a tripartite agreement,” said Sir Ian.
“We have got a focus on working together and it is quite clear … but obvious to me for some time … that Treasury have changed their focus from: ‘How much can we get for next year’s public expenditure?’ to: ‘’What do we have to do to maximise economic recovery and improve competitiveness?’
“I’m prepared to bank that as a very important, significant plus that’s taken place,” said Sir Ian, adding that the package of measures on offer has a breadth to it and that it is designed to stimulate investment.
He went so far as to say that the package shows that government really cares and is going to try to do something about getting the North Sea buzzing again.
Like others who spoke up at the briefing, Sir Ian too warned that time is tight, as indeed it is.
And the further the price of a barrel of Brent sinks (it is below $69 as I finish this), the greater the urgency.
Right now, the North Sea faces a ‘perfect storm’ and the oddest thing of all is that it is Danny Alexander on behalf of Treasury who has the lifebelt to chuck, except that its only part way out of its wrapper.
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