Chancellor George Osborne missed a golden opportunity to announce that the North Sea was open for business when he failed to simplify the tax regime for the oil and gas sector, according to leading industry expert Derek Leith of EY.
Osborne announced the Supplementary Tax will be reduced from 20% to 10% and that the Petroleum Revenue Tax would be effectively “abolished”.
Leith, head of EY’s oil and gas unit, said the Chancellor should have used the 2016 Budget to simplify the North Sea fiscal system with a straight 30% corporation tax – sending a clear signal to investors the Government was listening to industry calls for fiscal transparency.
“The Chancellor could have ripped up the supplementary charge, particularly with the abolition of PRT, and reverted to ‘normal’ corporation tax, albeit at a rate that is at least 50% more than non oil and gas companies are paying.”
“Without a shadow of a doubt, lowering the tax burden is positive, but given where we are as an industry, they could have gone further.”
“The other thing that really surprised me was the restriction on losses, that might have affected E&P companies. It will have an impact on service companies and the supply chain, who may well have losses in their business as an indirect result of the oil price. It won’t be welcome for these companies.
“This restriction generally is one of the main cash generators from the budget.
“You can’t say the chancellor has turned a deaf ear to the industry but from my perspective, it is a missed opportunity.
“When you look at the basin as a whole, even if you have a recovery in price, the basin is still going to not compete that well with other basins around the world.
“I talked to one group recently that said that one of their assets outside the UK would generate more production than all of their assets in the UK put together.
“For bigger companies, the UK is increasingly a marginal place for them. The government really needs to have accepted that the higher production taxes regime was okay in the early years, and then the high years of production from big fields.
“Once you get a whole plethora of smaller fields where the cost base has gone up and you’re dealing with production efficiency issues on the older, larger assets, you need to look at it from a completely different perspective.”
“We’ve seen some of the smaller oil companies, such as Iona and First Oil go to the wall, and that’s unlikely to be the end of it. It’s a big problem for the north east of Scotland and I would have preferred something a bit more radical.”
Leith said he believed the Government was taking the plight of the industry seriously.
“The fact David Cameron came to Aberdeen indicated it was high on the Government agenda.
“I think the Oil and Gas Authority will have brought a very positive influencing message to this whole debate. I think that is positive, but I’m left with a feeling that we should have been sending signal to investors about how attractive the UK is, from a fiscal perspective at least, will be in the future but that message could have been a lot more positive.”
Leith welcomed HMRCs clarification over the tax treatment of expenditure incurred following the transfer of a licence in an oil field on decommissioning.
The Treasury said the changes will provide £1billion in support for the North Sea oil and gas industry.
Osborne said he was “effectively abolishing Petroleum Revenue Tax” which had previously been at 35%.
Recommended for you
