UK offshore tax changes may have little impact, consultant claims

Offshore staff

GLASGOW, UK – Consultant Hannon Westwood (HW) says Britain’s latest changes to its North Sea tax regime are unlikely to have a significant impact on near-term investments.

To reduce the fiscal burden on the industry, Chancellor George Osborne proposed abolishing the petroleum revenue tax (PRT) and a 10% cut to supplementary charge tax (SCT), backdated to the start of the year. As a result, the headline marginal tax rate will drop from 67.5% (PRT-paying) or 50% to an even 40%.

However, HW questions the benefits to the UK continental shelf (UKCS). With so few oil companies currently paying tax to the UK Treasury in the currently depressed commodity price environment, the impact of post-tax relief is marginal in the short term, the consultant claims.

As for permanently zero-rating PRT, this simplifies the fiscal regime by leveling the playing field between late life fields and new developments. But the impact may be limited, as only 30 fields are liable to PRT and two of those are currently shut-in.

This equates to 536 MMboe of reserves with 73 equity holders as beneficiaries, but the change only affects 9% of current 2P reserves on the UKCS.

The reduction of SCT affects many more fields in the basin, HW adds, but reducing the headline tax rate by 10% is unlikely to trigger major new investment as the Investment Allowance is already targeted at reducing the tax burden.

HW points out that tax breaks were not offered to all stakeholders in the UK’s oil and gas industry. The government announced plans to reform the rules governing certain corporate carried forward losses, with legislation to be introduced in next year’s Finance Bill.

This will restrict the ability of companies to carry forward losses meaning that they cannot reduce profits arising on/after April 1, 2017, by more than 50%. Although the ruling will not affect companies within the ring fence, it will hit the UK’s oilfield service companies, the consultant points out.

Although the various changes may simplify the fiscal regime and reduce the headline tax rate, with so few companies in the basin currently paying tax, and nearly half the UK’s offshore fields currently loss making, the near-term impact on investment and activity will be negligible, HW claims.

Decommissioning and carry back of trading losses repayments, however, will likely exceed tax receipts by £1 billion/yr ($1.42 billion/yr) through 2021 if the oil price stays around $40/bbl. So reducing industry costs and decommissioning remain the greatest challenges both for the industry and the government.

03/23/2016

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