We all know the North Sea is in uncharted territory and the headlines over the past few months speak for themselves.
“North Sea oil industry close to collapse”, “North Sea oil at point of no return”, and “oil price crash threatens the future of the North Sea oil fields” are just a few. I’m sure you get the gist.
While it is undoubtedly true that times are tough on the UK Continental Shelf (UKCS), it’s important that we don’t lose sight of the fact that its fate still lies in our hands.
There are steps that can be taken which could go some way towards clearing the doom and gloom hanging over the North Sea – but they need to be taken now.
Understanding context is key. Firms operating on the basin are facing a perfect storm.
The price of oil has sunk substantially in the last few months, but now appears to be steadying off at about $60 per barrel.
However, Oil and Gas UK’s recent activity survey also confirmed that last year delivered the lowest production revenues for nearly two decades and the market experienced negative cash flow of £3.5billion – its worst position since the 1970s.
These are choppy waters but next week’s final Budget of the parliamentary term provides us with the opportunity to plot a new course for the North Sea fiscal regime.
Some positive changes were announced in Autumn Statement 2014 and there have already been indications of what we can expect in the future, but more needs to be done to ensure we have a fiscal regime that is fit for purpose.
Investment allowance – An investment allowance is expected to be announced, following the release of a consultation document from the Treasury on January 23. It should provide an uplift on qualifying expenditure, most likely at a rate of 62.5%, which brings it in line with the cluster allowance. This means a reduction in the effective tax rate for many firms, potentially to 30%, further simplification of the tax regime and increased certainty over investment decisions.
Tax rates – North Sea operators want to see rates reduced to 50%, with further decreases in the future. This may not happen in next week’s Budget but we anticipate a possible phased reduction over the next few years, most likely by lowering the supplementary charge. While in the short term this may reduce the tax take for the Treasury, the longer-term benefits of increased capital expenditure and the associated tax revenue should outweigh this reduction.
Exploration credit – Exploration is at very low levels and significant new discoveries are few and far between. While we don’t expect an imminent announcement on incentives for exploration, the Treasury does plan to carry out a consultation on this issue. It seems likely that the outcome of this will be similar to the Norwegian model of providing a credit for exploration expenditure, although we will need to wait and see how exactly this takes shape.
Ageing assets – The North Sea is a mature basin, with many assets reaching the end of their production lives. If much of this old infrastructure is decommissioned, there are a number of smaller fields which will become economically unviable. The right assets need to be put in the right hands to prolong their use, a process which needs to be underpinned by a supportive fiscal regime. Currently, this isn’t the case as tax histories do not transfer from buyer to seller – meaning full tax relief is potentially not available for future decommissioning expenditure. This needs to change if we’re to make the most of existing infrastructure.
While the Budget will only deliver some of these changes, it’s a perfect opportunity to look at how else we can inject some stability into the North Sea.
Substantive and holistic change in all of these areas is how we can steady the ship but that will require quick and decisive action.
Derek Henderson is senior partner in the Aberdeen office of professional services firm Deloitte.
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