The UK government has unveiled a sweeping plan to reward investment in the North Sea with the aim of extracting as much oil and gas as possible.
A review of the oil and gas sector’s tax regime was announced in this year’s budget, with a new Treasury report saying “significant change” was needed to continue to attract investment.
Chief Treasury Secretary Danny Alexander launched the new report as he met with key industry figures on a visit to Aberdeen today.
There are still “significant hydrocarbon reserves” on the British Continental Shelf (UKCS), the government said, which could “generate significant benefits for the UK” if they can be recovered.
He estimated that up to 21 billion barrels of oil equivalent could remain offshore, and the report says industry experts believe 15 to 16.5 billion barrels are economically recoverable.
The UK government’s response to the review said: “Offshore production will continue for many decades to come.”
But he added that UKCS operators “face stiff competition for scarce investments as the economy of the basin has fundamentally changed.”
He said there were also “opportunities to simplify the tax system to provide greater certainty, lower administrative burden and less distortions”.
The report continues: âThe government’s view is that current levels of investment cannot be sustained without tax changes. The trend towards smaller fields and higher costs means that typical UKCS projects will find it difficult to attract investment in a competitive global environment. time to make this change to ensure the UKCS can compete for global capital.
âThis document therefore presents a radical plan to reform the tax system. The reforms are designed to support the government’s dual objective of maximizing the economic recovery of hydrocarbon resources while ensuring a fair return on these resources for the nation.
The key to the reforms is an immediate cut in the rate of the additional burden on the profits of oil companies, from 32% to 30%, which was announced yesterday by Chancellor George Osborne in his fall statement.
The UK government is also planning to introduce an investment deduction which it says will further reduce the effective tax rate for companies investing in the North Sea.
Financial support will be provided for investigations in under-explored areas of the UKCS, with the government working with industry to find shared funding options.
At the same time, options to improve access to tax breaks for decommissioning need to be developed
“Together, these measures represent a radical plan to reward investment in UKCS at all stages of the industry’s lifecycle,” the Treasury report said.
âThese reforms will make the tax system more competitive, simpler and more predictable, and represent the most balanced and investment-oriented way to move towards lower tax burdens over time. They will support billions of pounds of investment throughout the life cycle of fields. . ”
But he stressed: “Government action must be accompanied by industry action and the government expects the industry to make significant improvements in production operations, improving its profitability. and business practices consistent with the objective of maximizing economic recovery. ”
The industry’s new regulator, the Oil and Gas Authority, will be responsible for monitoring and reporting on the industry’s progress in these areas.
Mr Alexander hailed the North Sea oil and gas sector as “one of the country’s greatest industrial success stories”, saying: “It remains the largest industrial investor, supplies just over half of the needs in primary energy from the UK and supports hundreds of thousands of jobs. ”
But in the foreword to the report, he said: âThe remaining oil and gas is becoming increasingly difficult and expensive to extract, and changes in the global oil and gas landscape could make it more difficult to continue to attract oil and gas. global capital without substantial improvements in taxation. and the regulatory landscape. ”
He said that was why the Chancellor announced a review of the industry’s tax regime, and added: âThis document presents the findings of this review: a radical plan to reward investment in the industry. UKCS at all stages of the industry lifecycle. .
“It recognizes that to maximize investment, we need to reduce the overall tax burden facing the industry, and sets out long-term principles for the future that we believe government and industry can both adhere to as well.” as specific actions to ensure a more competitive environment. , simple and predictable tax system. ”
Speaking in Aberdeen, Mr Alexander said: ‘I have always been an advocate for Scotland’s thriving oil and gas industry, which is why I am here today to announce the government’s ambitious agenda to continue supporting this extremely valuable sector.
âWe encourage and work with the industry to develop new investment opportunities and support new areas of exploration. This will help ensure that the industry continues to thrive and contribute to the economy. This level of support is only possible because we can leverage the strength and combined resources of the UK.
Treasury Secretary Priti Patel said: âThe government is demonstrating its long-term commitment to supporting the North Sea oil and gas industry.
“Our new package of measures is designed to reduce the tax burden on the industry, by stimulating investment in the North Sea which will bring economic benefits to the UK for many years to come.”
Scottish Energy Minister Fergus Ewing said: ‘Following the admission by the British government that it has been 21 years since the oil and gas industry has benefited from a tax cut, the train of measures announced in the fall declaration is a first step in improving the tax system of the industry.
“However, this announcement does little to reverse the unexpected and damaging 12% increase in the additional charges tax introduced by Danny Alexander in the 2011 budget. They increased taxes by 12% in 2011 and did not cut them by only 2%. Credit like they do on a 10% overall tax hike won’t impress much in the industry. They promise more cuts in the future but don’t offer much less plans of deadlines.
âIt is encouraging that the UK government has taken on board the recommendation of the Scottish Oil and Gas Expert Commission by moving towards investment allocations based on investment costs rather than physical characteristics of a field. The wider dissemination of this approach should reduce the currently complex and confusing system that acts as a barrier, not an incentive, to investment. In moving these changes forward, it is essential that the UK government engages with industry, the new regulator and the Scottish government to maintain momentum with these critical budget reforms.
âThe UK government is also committed to looking at the broader economic benefits of oil and gas production rather than just focusing on the short-term impact on revenues. part of a fundamental shift in the way oil and gas policy is formulated, focusing on maximizing the total value added (VAT) generated by North Sea activity for the economy and society at wider. ”
But Friends of the Earth director of policy and campaigns Craig Bennett said: âAs the international community tries to craft a plan in Lima to deal with the threat of catastrophic climate change, the UK government is trying to extract as much oil from the North Sea as he can.
“It is first-rate environmental and economic illiteracy.
“Ministers must end their obsession with dirty fossil fuels and build a clean economy for the future based on energy efficiency and the country’s enormous renewable energy resources.”