Oil & Gas UK has welcomed HM Treasury’s announcement today (14 July) of a formal consultation into the future of the UK offshore oil and gas tax regime. The industry’s leading trade body believes the sector faces an uncertain future and that the tax review is therefore now urgently needed.
The UK continental shelf (UKCS) is a mature offshore oil and gas province and one of the world’s most expensive basins to operate and invest in. Despite current record rates of investments, there are worrying signs that investment will halve over the next four years whilst exploration remains at an all-time low. Production has fallen rapidly in recent years particularly in some of the oldest fields in the North Sea which are taxed at rates of up to 81 percent.
Michael Tholen, Oil & Gas UK’s economics director observes: “The current fiscal regime has become increasingly complicated and unpredictable with high tax rates combined with a multiplicity of allowances. While targeted allowances have successfully encouraged a wave of activity in recent years, temporarily halting the production decline, their impact is diminishing in an ever more expensive business climate. Investors are increasingly looking to invest elsewhere rather than in the UK.”
The Department for Energy and Climate Change and the Wood Review both agree that the UK has significant remaining offshore oil and gas resources. Oil & Gas UK believes there could be up to 24 billion barrels of oil and gas still to recover; however, these will remain untapped unless there is a swift change.
Malcolm Webb, Oil & Gas UK’s Chief Executive, said: “The Wood Review calls for a tripartite approach to the UKCS between HM Treasury, the new regulator (the Oil and Gas Authority) and industry to maximise economic recovery (MER). The current fiscal regime is becoming a barrier to investment both in new fields and in the many mature opportunities. This will be the first instance of MER in action and we have high expectations for what the consultation will deliver.
“While our members will work closely with HM Treasury to respond in depth to the Consultation this review must lead to early action. It cannot simply be a paper exercise. The tax regime must be simplified and the headline rates reduced to send a strong signal that the UKCS is open for business.”
The North Sea continues to have a big impact on our economy. Crude oil and gas provide around three quarters of the country’s primary energy and this level of dependency is unlikely to change significantly for many years to come. Government policies to encourage investment that maximises domestic oil and gas production makes economic sense, in that this helps to minimise costly energy imports and strengthens the UK balance of trade.
Promoting a strong indigenous oil and gas industry also has wider economic benefits. This industry was the largest industrial investor in the UK economy last year (£14 billion in 2013) and its supply chain has a turnover of over £35 billion, of which more than £14 billion of goods and services were exported to a global market. The sector supports some 450,000 jobs in the UK.
All of this is at risk if activity declines and there is no upturn in exploration.