Oil and gas experts have called on the UK Government to introduce further tax breaks for North Sea operators to counter the damage of its £10billion raid on the industry.
Chancellor George Osborne has said it will take a long time to rebuild the sector’s trust in the Treasury after his shock Budget announcement earlier this year, but a concession to the industry was introduced last month to mitigate some of the impact of the levy rise.
In the face of reports that drilling activity in the North Sea had more than halved and dire warnings that the levy rise could cost the industry more than £50billion and tens of thousands of jobs, the Treasury said it would extend the ring-fence expenditure supplement (RFES). It is hoped the concession will be the first in a series of measures to stimulate investment in the North Sea, including potential tax breaks in next year’s Budget.
RFES was introduced seven years ago to make the UK continental shelf more attractive for loss-making operators by allowing them to increase the value of losses they carried over from one year to the next for tax-relief purposes.
Mark Higginson, senior partner in Aberdeen at professional service firm PwC, said the incentive was a step in the right direction, but urged the government to go further.
He said: “RFES . . . is not going to kick start a massive wave of exploration. It is more of a concession to the smaller companies, but even they will not feel the benefit for years, if at all. Hopefully it is the first of many smaller moves needed to bring confidence back to those investing in the North Sea.”
Mr Higginson added that the Treasury should also clarify what the price of a barrel of oil had to be before the supplementary rate of tax was reassessed.
Mike Tholen, economics director at industry body Oil and Gas UK, said the RFES extension was a constructive move which helped a select few projects, but added: “It will not redress much of the damage caused, as a top rate of 81% tax and fiscal uncertainty raises serious concerns about the sustainability of an industry which can be so valuable to the country economically and in terms of energy security.”
He said OGUK was trying to establish the most effective ways of reducing the damage and said further extensions to field allowances would be required, adding: “OGUK is also working with the Treasury to find ways to achieve certainty regarding companies’ access to tax relief for decommissioning, which will encourage late-life investment and liberate the transfer of assets to those companies best suited to maximise investment and lengthen the lives of mature fields.”
Derek Leith, oil and gas partner at professional service firm Ernst and Young, said field allowances were already in place for small fields, heavy-oil projects, ultra-high-pressure/high-temperature developments and gas fields west of Shetland.
He said: “Much of the deliberation within industry is whether these need to be increased in scale so that a greater amount of allowance is given, or whether the criteria need to be relaxed to allow more prospects to qualify for the allowances.”
Mr Leith added a balance also had to be struck on allowances for incremental investment in existing fields. He said the Treasury had to make sure it encouraged the exploitation of satellite wells at brownfield developments, but said any tax break should not also be applicable for projects which would have gone ahead anyway.
A Treasury spokeswoman said the government would consider the case for further support for marginal projects and said the RFES increase “demonstrated the government’s commitment to ensure the allowances work effectively and equitably”.
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