The Chancellor George Osborne in his budget has proposed reducing supplementary tax by 10% and to reduce petroleum revenue tax by 15%. Will these measures help save the North Sea oil industry from untimely terminal decline?
For many decades the North Sea oil industry been the outstanding UK industry performer. In terms of high investment, job creation and sheer ingenuity and inventiveness it has raised the UK profile to record high levels.
It has sustained the UK economy and safeguarded the UK’s energy security. It is a categorical imperative that it continues to do so for decades to come. Will Chancellor Osborne’s above proposals ensure that outcome?
Basically the question is whether or not the industry believes that the fiscal package now on offer is commensurate with the risks involved in investing in the future of the North Sea at current or future oil prices.
The reduction of the supplementary charge from 30% to 20% will make a difference. Everything else being equal it will increase production across the sector.
But it still leaves most oil companies paying a marginal rate of tax of 50% once the ring fence corporation tax of 30% is taken into account. With oil prices in the $50 a barrel region it is far from clear that the industry is viable.
Certainly a fair proportion of the 300 plus fields currently in operation will not be viable, even if strident efforts are taken to reduce costs. The logical course of action is for the industry to wait and see if oil prices increase before committing further investment funds.
Alternatively they might decide to relocate to less mature pastures outside of the UK.
Such a move would start decommissioning activity not in 20 years time but in the imminent future.
For those companies which also pay petroleum revenue tax (PRT) the previous marginal rate of tax of 80% will be reduced to 67.5 % by the Chancellor’s proposal to reduce PRT from 50% to 35%.
This proposal will not make a material difference to the companies involved. A golden opportunity has been lost to scrap PRT completely. It is a tax that is currently withering on the vine and it should have been pruned out of existence.
Again, oil executives may adopt a wait and see policy before fully committing their companies to risky investments that depend on an uncertain future rise in oil price.
If the Chancellor had taken the decision to markedly reduce taxes and for the time-being treat the oil sector in the same way as other industry sectors in fiscal terms then the future prospects for the North Sea would be rosier than the current situation.
Alex Russell is professor of Petroleum Accounting at Aberdeen Business School and Peter Strachan is the Professor of Energy Policy at Robert Gordon University
Recommended for you
