As the dust begins to settle on another Budget, it is worth taking a few moments to reflect on the likely impact of the fiscal changes that have been announced on the Oil & Gas industry.
Often the headlines can flatter the effectiveness of the underlying measures or miss some key aspects.
My focus this week has been mainly on upstream companies, as changes to the oil and gas fiscal regime clearly have a knock on effect on activity levels which cascades down the supply chain.
However, today allow me to start with the oilfield service (OFS) companies.
The good news for the OFS sector is that the corporate tax rate continues its recent downward trend, with a further reduction in the rate from the previously announced 18% to 17% by 2020.
That good news is somewhat mitigated however, by a number of other measures including restrictions on interest deductibility and the introduction of withholding tax on certain royalty payments made to non-residents.
In addition, and in a move that surprised most analysts, the Chancellor announced fundamental changes to trading losses.
These will introduce a measure of flexibility, but will also restrict any carried forward loss that can be offset against trading profits to 50% of the profits (subject to a £5m exemption).
Currently companies would only be taxable on profits arising when brought forward losses are fully utilised.
Going forward companies with taxable profits will always pay tax on a minimum of half these profits regardless of the quantum of carried forward losses.
For companies in the OFS sector, the combination of these changes on interest deductibility and loss utilisation will be a very unwelcome added burden, as they struggle to come to terms with much reduced order books and significant pressures on margin.
Turning to the upstream companies the oil and gas fiscal changes were costed as providing £1bn of support to the industry.
I have no reason to quibble with the calculation of the cashflow impact of the measures, but I suspect that much of this £1bn is money the upstream companies would have had repaid to them anyway in years outside the 5 year period covered by the costing estimates.
If one assumes that for many PRT fields future taxable profits are less than the estimated cost of decommissioning then any future PRT payments made would ultimately have been repayable.
In that context the reduction in rate ensures that the companies don’t have to make a loan to government in respect of PRT they would ultimately recover.
The change is a helpful one, but its worth for many is really that net present value benefit rather than an absolute reduction in the total future PRT take.
However, at a time when cashflows are very tight any reduction in outflows will be welcomed.
The Budget data doesn’t disclose how much of the £1bn relates to the reduction in supplementary charge.
As the vast majority of companies have trading losses it is hard to imagine that substantive amounts of supplementary charge were expected to be paid over the 5 year period, especially given the benefit of the investment allowance.
In the round, these changes will have a fairly minimal impact in the short to medium term. That was always going to be the case given the tax position of the upstream sector at present.
The measure of their worth is not in the short term, it is more the signal it sends to investors – and it is another step in the important journey of convincing government that a lower tax, simpler regime is the correct fiscal environment for a mature basin.
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