UPDATED 1230 TODAY
The Treasury certainly has been listening to the woes of the UK’s offshore industry, battered by the deadly impacts of collapsed global oil prices global oil prices and a fiscal regime that was totally unfit for purpose.
Osborne, Alexander & Co have come up with a package of fiscal changes that definitely improve the situation. But do they go far enough?
Oil & Gas UK’s chief executive Malcolm Webb certainly comes across as pleased in his initial statement; whether that view will be tempered once the measures have been fully digested remains to be seen.
However, Alan McCrae, head of energy tax at PwC is an example of someone who is less sure. While acknowledging that the changes are for the better, his view matches mine … that more should have been offered.
“These measures should hold the wolves from the door for now, but if oil prices deteriorate or remain low for longer than firms can bear, then something more radical may need to be done if investment and jobs are to be protected,” he said.
Obviously the single, basin-wide tax allowance was expected and is apparently very welcome as it is supposed to replace the mess of allowances that has grown up over the past four/five years to appease for the 12% Supplementary Charge hike imposed five budgets ago by Osborne, Alexander & Co and which had an immediate negative impact on North Sea prosperity.
But all that has happened is that the Supplementary Charge has been taken back to where it was five years ago … 20% as opposed to 32%. And while Corporation Tax gets cut to 20% for others, guess what, the North Sea remains saddled with 30%.
It was former chancellor Gordon Brown who implemented the Supplementary Charge over and above the 30% Corporation Tax that he also introduced. He did it in two 10% steps.
The second was on 5 December 2005. Moreover, by doubling SCT to 20%, Brown caught the industry on the back foot and against a backdrop of plummeting domestic oil and gas output. That fiscal manoeuvre initially back-fired as various planned new developments were axed by disgruntled operators.
The average price of Brent for December 2005 was $56.75. Today, Brent is trading around $53 against a background of dramatically lower output and much higher costs. As if to mock however, around 20.30 in the evening, Brent had traded up to around $56.60, in other words to within a whisker of the December 2005 average.
Another difference is that, in 2005, the industry was still relatively fit with costs under reasonable control, not flabby and out of condition as it is today and facing a massive drive to get fit-for-purpose again.
Some pundits weren’t expecting anything to be done to PRT yet; but it has been cut from 50% to 35%, which is great news but presumably this as an interim measure ahead of eventual abolition as that is a long-term aim of the industry and one that Treasury seemed to accept.in its North Sea fiscal paper issued last December.
What about the £20million seismic focused exploration allowance, which I understand will be managed via the Oil & Gas Authority … I’m sure someone will put me right if that’s wrong. It seems a trifling sum given how much of the UKCS has never been surveyed, let alone in detail.
Check the OBR’s figures and exploration and appraisal drilling is not going to improve. It’s in a shocking state now and, at a projected £800million a year annual industry spend through to 2019.
Last year the, spend was £1.1billion, according to the OBR.
OK, rig rates have come down sharply and that helps a bit, but! And it’s a big but, the E&A projection is very discouraging. You can have the best seismic data in the world to hand, but the only way to make discoveries is to drill, drill, drill!
I’m also struggling with the Treasury’s assumption for its central forecast that the policy measures “will boost oil production by 14 per cent, capital expenditure by 23 per cent and operating expenditure by 6 per cent.” I can’t see the production gain, I can’t see that level of capital expenditure uplift in the current climate and possibly not even at around $70 per barrel, but I can see production costs rising.
This morning I have noted a comment by Alexander that adds up to a clear admission that more must be done to sort out the UKCS fiscal regime. He told the Press and Journal’s Westminster editor: “I would say that even beyond today the direction of travel in the tax regime needs to continue to be downwards so I think that people can expect that in the years to come there can be further reductions both in the PRT and the Supplementary Charge.”
As for the City, go check out your oil shares. I get the impression that the Square Mile is nonplussed. But do bear in mind that it is currently out of love with oil producers large or small anyway.
For more analysis about the budget, click here.
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