The reforms to the oil and gas tax regime announced by the Chancellor and Danny Alexander this week are, of course, welcome.
Particularly in light of the Chancellor’s admission that it has been 21 years since the oil and gas industry last received a tax reduction.
However, this announcement only goes a short way towards reversing the unexpected and damaging 12% increase in Supplementary Charge tax introduced by Danny Alexander at the 2011 Budget.
They raised tax by 12% in 2011 and now cut by only 2 per cent. To claim credit as they do on an overall tax hike of 10 per cent will not impress many in the industry. They promise more cuts in future but offer no plans, far less timescales. That is not good enough.
There has been overwhelming evidence from the Wood Review and Scotland’s Oil and Gas Expert Commission of the impact of the UK Government’s track record in managing the oil and gas fiscal regime.
One of the key failings being that decisions have focused on short-term impacts on tax revenues as opposed to the longer-term effect on maximising recovery and value creation.
Professor Alex Kemp has also suggested that such a small reduction in Supplementary Charge, is unlikely to have ‘a significant effect’ on turning around falling investment rates in the North Sea.
The industry needs predictability. If, as the UK Government states, there will be further tax reductions they need to know what they will be and when they will be made.
Had they done so the industry would have welcomed that. But their failure to do so suggests that they do not really understand even now the long term nature of the investment decisions that are required if the life of the fields in the north sea is to be extended as it must.
The failure to do this will cost potentially billions of pounds of revenues, especially if as is feared the oil price may dip further in the short term.
When I wrote to the Chancellor earlier this year to highlight Scotland’s Oil and Gas Expert Commission recommendations in relation to the fiscal regime, I made it clear that it would require significant reforms to secure the necessary long-term investment in the North Sea that is required if we are to recover the potential 24 million barrels of oil and gas that the industry estimate remains.
Failure to secure this potential prize could have far reaching impacts throughout the economy and society as a whole.
The oil and gas sector plays a pivotal role in Scotland’s economy, not just through the direct tax revenues it generates but through the valuable contribution made by the wider supply chain and the skills and innovation benefits this brings.
If we are to maximise economic recovery and ensure the maximum overall value is generated by the industry, then we must all work together. With responsibility for economic development, the Scottish Government must play an active role in the reforms required.
My letter to the Chancellor called on him to step up to the mark and take full advantage of the opportunity that this Fiscal Review represents. The announcements this week show that the reform process is far from finished and it is essential that the UK Government engages with the industry, the new regulator and the Scottish Government to maintain momentum with these critical fiscal reforms.
I’m glad to see that many of the recommendations from Scotland’s Oil and Gas Expert Commission are now going to be put to consultation next year.
The Scottish Government has continually made the case that these important decisions need to be discussed in a constructive way with industry – rather than being implemented by the UK Government without notice.
Future reforms such as the additional support for exploration activity and the basin wide investment allowance will be central to extending the longevity of North Sea activity.
In particular, moving towards investment allowances based on capital costs rather than the physical characteristics of a field, should reduce the currently complex and confusing system which acts as a barrier, not an incentive, to investment.
While oil prices have recently dipped, OPEC are predicting a recovery in price to $110 per barrel for the rest of the decade and around $100 in real terms in the long-run – however, these fluctuations simply show how it is more important than ever that we have a competitive and stable tax regime and we need it in place as soon as possible.
Fergus Ewing is the Scottish Minister for Energy, Enterprise and Tourism.
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