Urgent Tax Cuts Required Says Oil & Gas UK

Published at 10:26AM - 23/02/16

Urgent tax cuts required says Oil & Gas UK, adding that the UK offshore oil and gas industry is now entering a new phase of ‘super maturity’.

The announcement was made Tuesday on the release of Oil & Gas UK’s (OGUK) 2016 Activity Survey.

Oil & Gas UK’s chief executive, Deirdre Michie, said “Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here.

Cost Reductions

In its annual survey, UKOG found that the UK based oil and gas sector had been successful in reducing its costs by around 40%, making the industry far more competitive in the current climate.

However whilst success per exploration well drilled in 2015 was the highest for ten years, the rate of exploration for new oil and gas reserves remains at an all-time low.

Just 13 exploration and 13 appraisal wells were drilled in 2015 and, as companies restrict capital even further, as few as seven to ten exploration wells and six to nine appraisal wells are forecast to be drilled this year – leading to a further downturn in activity.

According to UKOG the North Sea sector as a whole is now entering a new phase that makes reduced costs and attractive tax and government assistance more crucial than ever. A phase being coined as the North Sea’s ‘Super Maturity’ by Michie.

 

North Sea Super Maturity

Looking ahead, with depressed production revenues leaving very little to re-invest, less than £1 billion of fresh capital in new projects is expected to be sanctioned this year, compared with an average of £8 billion per year over the last five years.

Total capital expenditure fell from £14.8 billion in 2014 to £11.6 billion last year and is expected to fall further this year to around £9 billion. This drop in activity is being felt right across the supply chain, which contracted by one quarter in the last year.

Michie added: “The UKCS is entering a phase of ‘super maturity’.  While the industry’s decades of experience provide great depths of knowledge and expertise….. the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas.”

Offshore Oil & Gas Tax Cuts

Deirdre Michie continued: “The basin has to compete fiercely in the global market to attract price-constrained capital to the UK.  A coherent approach by the industry, regulator and Government will be critical to boost the industry’s competitiveness and its investors’ confidence.”

“Together we need to transform the basin into a highly competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the important supply chain based here.”

“It is absolutely crucial that the recently announced Aberdeen City Region Deal and funding for the Oil and Gas Technology Centre, which will help support the industry in the longer term, is accompanied by the right signals in relation to the tax regime.”

“The industry currently pays special taxes at a headline rate of 50 per cent (67.5 per cent for fields paying PRT).”

“A significant permanent reduction in those rates is now urgently needed, a move which would be consistent with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.”

“This should be combined with additional measures to help unlock the late-life asset market and encourage exploration by permanently removing the special taxes from all discoveries made over the next five years.”

 

Oil & Gas UK Conclusion

“Finally, improving the effectiveness of the Investment Allowance would stimulate activity in the short term and attract fresh investment.”

Michie concluded: “We have a huge task ahead but the prize is worth fighting for. The UKCS still holds up to 20 billion boe which can continue to provide a secure supply of energy for the country, support hundreds of thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain and stimulate countless technological innovations.”

The 2016 Activity Survey From Oil & Gas UK Gan Be Down Loaded By Clicking Here