The Chancellor slashing North Sea taxes in next week’s Budget is not the answer for steadying the sector’s financial course, according to a financial expert.
Tom Faichnie, a partner at RSM, is the latest voice to join the debate around the industry’s financial future.
Faichnie spoke out after new figures revealed oil and gas revenues fell by 55%.
The slide spurred Deputy First Minister John Swinney to call for more North Sea tax cuts.
However, cutting tax would fall short of cushioning the financial blow of that past year, according Faichnie.
“This report covers the financial year 2014-15 and as a result, doesn’t take account of more recent developments in the Scottish economy and the damaging effects of a prolonged low oil price,” he said.
“The Scottish economy may have remained resilient during the year in question, but this should not be a reason for complacency now.
“It is no great surprise that Mr Swinney has repeated his call for a reduction in the headline rate of tax for the oil sector. While this would of course be welcomed, it would not address the issue that the North Sea has to encourage more exploration and development and attract new entrants into the market who operate with a lower cost base than many of the existing operators.
“As exploration activities are, by their nature, loss making, cutting the headline tax would not on its own drive operators to increase exploration and development. Instead – or in addition – the Chancellor should look at other tax incentives to encourage investment, perhaps taking the lead from Norway, which operates a tax incentive scheme where exploration and development losses are recoverable in advance of the profits being made and which can be used as security for debt funders.
“Unfortunately, we have a tax structure where rates were set at a time when oil companies were making significant profits and when much of the rest of the UK economy was in recession. These tax rates completely ignore the fact that the cash from these profits need to be re-invested into sourcing and developing new reserves. How can we now expect these loss making activities to continue when the operators are increasing production just to stay afloat?
“The tax system for the North Sea has to radically change and cannot just be done with a headline grabbing tax rate reduction.”
Last month, David Cameron flew-in to Aberdeen with a financial rescue package.
When pressed by Energy Voice whether the Government made a mistake in its 2011 “tax grab”, the political leader said he stood by the decision.
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