George Osborne Presents New UKCS Tax Measures

Published at 01:44PM - 05/12/14

After repeated calls to show a genuine commitment to the UK North Sea, Chancellor George Osborne has confirmed a set of fiscal measures created to stimulate additional investment in the UKCS oil and gas industries.

In this week’s Autumn Statement, he confirmed that the current supplementary charge that oil firms pay on their profits would be reduced to 30pc from 32pc. Oil and Gas UK said that the announcement was an important initial move in improving the UK North Sea’s tax regime and competitiveness. The move is the first drop in tax for the UK North Sea in over two decades.

A second measure saw the introduction of a new allowance for cluster areas which will encourage investors to buy into high-temperature and ultra-high-pressure clusters.

Mr Osborne was quick to point out that the UKCS had seen record levels of investment in 2014 but sounded a warning on lower oil prices, saying that they provided a clear challenge to the ‘vital’ oil and gas industry, which has always been of strategic national importance to the UK.

This Thursday, Danny Alexander, the Treasury Chief Secretary, will lay out full details of the government’s proposals at a conference in Aberdeen.

Oil and Gas UK’s CEO, Malcolm Webb, said that his organisation was welcoming the news that the ring-fenced spend supplement would be extended and allow investments to be offset against future levels of production for up to a decade instead of the current six-year maximum. This development will align offshore and onshore tax regimes for oil and gas production and could encourage fresh entrants to operate in the basin.

However, he said that these initial announcements were only the first steps needed towards genuinely improving the overall competitiveness of the UKCS, adding that overall taxation rates would need to be reduced to ensure the industry’s long-term success. He also said that given the current exploration crisis, the government would need to put forward clear and coherent strategies for promoting basin-wide exploration. The HM Treasury does, however, say that it has additional proposals to put to the industry and will be discussing these this week.

PwC’s head of energy tax, Alan McCrae, said that Britain’s government had clearly been absorbing the oil and gas industry’s concerns and developing a strong understanding of the varied and diverse issues that it faces, particularly in the face of an increasingly challenging and maturing environment. He believed that the three new measures would be broadly welcomed amongst the oil and gas industry and seen as a positive sign by investors that the UK government was ready to listen to their worries and act to mitigate them.

Only last week, industry leaders joined together to strengthen calls for tax breaks in the industry after a survey showed that sector confidence had plummeted to its lowest levels in six years. The report’s conclusion stated that fiscal reform was needed to stimulate and support the necessary changes.

Market analysts, investors and oil and gas companies will now wait to learn the further details of additional proposals promised by Danny Alexander later this week.