UK government cuts petroleum tax rate

Offshore staff

LONDON – Britain’s Chancellor George Osborne has introduced new measures designed to stimulate exploration and development in UK waters.

From Jan. 1, 2015, the tax rate on UK offshore production will be cut by 2%, the first lowering of rates in the UK North Sea for 21 years.

The industry currently pays tax on oil and gas production at rates varying from 62-81%. These will be reduced to 60% and 80%, respectively.

Osborne also outlined plans to extend the ring fence expenditure supplement (RFES). According to industry association Oil & Gas UK, this will allow investors to offset their costs against future production for up to 10 years instead of the current six.

Additionally, he introduced a new allowance to encourage development of high-pressure/ high-temperature (HP/HT) oil and gas fields within cluster areas. He was due to meet with representatives from the industry in Aberdeen to discuss these and other potential reforms.

Maersk Oil welcomed the ultra-HP/HT cluster area allowance, which it said would lead to increased exploration and future production activity in the surrounding region. The company’s Culzean development in block 22/25 in the UK central North Sea will likely be the first beneficiary of the new allowance.

Subject to a final investment decision next year, Culzean could come onstream in 2019, supplying around 5% of the UK’s total gas consumption by 2020/21.

Oil and Gas UK CEO Malcolm Webb said his association was also encouraged by the Treasury’s stated intention to reduce North Sea tax rates further.

“We understand the economic constraints under which today’s autumn statement is delivered,” said Webb. “Therefore we take the chancellor’s announcement of a reduction in the industry’s tax rate as an important first step to improve the fiscal competitiveness of the UK North Sea.”  

He cautioned that the new measures “can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea. We will certainly need further reductions in the overall rate of tax to ensure the long-term future of the industry. Given the current crisis in exploration, we also need to see measures to promote exploration activity across the basin...

“The UK offshore oil and gas industry faces difficult times. Over the last three years, exploration activity has slumped, production has declined by 40%, and operating costs have risen by 40%. We now see a $40 fall in the price of oil. 

“However, with strong commitment from HM Treasury, the swift implementation of the Wood Review, and industry action on cost and efficiency, we can today be a little more optimistic about the future. The autumn statement underlined the importance of this industry and the contribution it makes to our economy. This offers us a way forward.”

12/04/2014

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