DW: North Sea tax cuts merely a drop in the bucket?

After the UK government revealed that the oil and gas industry would be aided by tax cuts worth £1 billion, Douglas-Westwood, an energy consultancy group, has raised a question whether this is too little too late. 

On March 16th, the UK government effectively abolished the Petroleum Revenue Tax (PRT) and reduced the supplementary charge tax from 20% to 10% – a measure which could result in ~£1bn tax break over the coming five years. The government’s aim is to encourage investment in infrastructure and new developments, as well as support production from existing fields in the UKCS, Douglas-Westwood explained in its Monday report.

However, DW asks, is this just too little too late?

With production in decline, the UK oil & gas industry has been severely impacted by a longer than anticipated suppression in oil price. This has led to widespread job cuts, reducing the workforce by approximately 26% (65,000 jobs lost).

Ultimately, a change in taxation regime is not going to dramatically alter the fate of production operations within the North Sea, said DW. What is required is substantially increased investment, this is only likely to occur as a function of higher oil prices, the energy consultancy group continued. Operators also require support in ensuring that production infrastructure is maintained – and accessible – to allow future additions through satellite developments. Widespread decommissioning could put this under threat, potentially limiting future field activities and ultimate recovery in the UKCS, DW noted.

The current downturn does provide some upside for service providers – the UK is expected to the largest decommissioning opportunity in the coming decade, the consultancy group argued. Douglas-Westwood’s new North Sea Decommissioning Market Forecast 2016-2040 predicts that between 2016 and 2040 $44-$50 billion (bn) will be spent on decommissioning activity on the UKCS.

This is over half of all forecast decommissioning expenditure in the report which also considers Denmark, Germany and Norway. The UK has the largest volume of installed infrastructure, as well as the oldest platforms. DW said it believes that decommissioning could play a key role in ensuring ongoing activity for service companies within the North Sea.

Ultimately, DW said, the UKCS has specific issues and challenges that will not be solved by broad-brush fiscal policy from Westminster. The need for the industry to work together to find collaborative solutions has never been greater, Douglas-Westwood concluded.

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