UK oil and gas industry calls for 'urgent' tax reform as activity and investment fall to all-time low

The £1bn figure represents a significant drop from the £8bn spent on average over the past five years, and comes despite industry efforts to reduce operating costs by one third over the course of 2015, industry body Oil and Gas UK has said. This reduction in spending will have a knock-on effect across the supply chain, which contracted by one quarter during 2015, according to its annual 'activity survey'.

Oil and Gas UK chief executive Deirdre Michie said that "urgent" tax reform to support the transition of the UK basin to 'super maturity' was needed. In particular, the industry needed a "significant permanent reduction" in its 50% headline tax rate to be introduced as part of next month's Budget announcements, she said.

"The basin has to compete fiercely in the global market to attract price-constrained capital to the UK," she said. "A coherent approach by the industry, regulator and government will be critical to boost the industry's competitiveness and its investors' confidence."

"We have a huge task ahead but the prize is worth fighting for. The UKCS [UK Continental Shelf] still holds up to 20 billion boe [barrels of oil equivalent] 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," she said.

The UK oil and gas industry reported a 10% increase in production in 2015, to an average of 1.64 million boe per day; as well as a higher rate of success per exploration well drilled over the course of the year. However, the 70% drop in oil prices and 20% drop in average daily gas prices in the last year resulted in a 30% drop in industry revenue, to £18.1bn, over the same period. Nearly half of UKCS oil fields are expected to be operating at a loss this year if the oil price remains at around $30 a barrel for the rest of the year, Oil and Gas UK said.

The slight rise in oil and gas production recorded by the survey contributed to a reduction in operating costs from an average of $29.30 per boe in 2014 to an average of $20.95 per boe in 2015. This is expected to fall still further during 2016 to around $17 per boe, amounting to a 42% reduction in costs over two years. However, firms are reporting that these efficiency improvements are not enough to keep older fields in particular viable: the number of fields expected to cease production between 2015 and 2020 rose by 20% to over 100 during 2015, while reserves reported by companies for potential future development dropped from 10 to 8.8bn boe over the same period.

The UK government cut petroleum revenue tax (PRT) from 50% to 35% as of 1 January 2016 as part of a package of measures to assist the industry announced during the 2015 Budget last March. The effect of these measures was to reduce the marginal tax rate on oilfield profits to 67.5% for fields subject to PRT and 50% for other fields. The Scottish and UK governments have also recently announced a £250m ‘City Deal’ investment package for Aberdeen, which is particularly reliant on the industry, along with additional investment commitments from the Scottish Government.

Oil and Gas UK chief executive Deirdre Michie said that it was “absolutely crucial” that these long-term commitments were “accompanied by the right signals in relation to the tax regime”. A “significant permanent reduction” in the headline tax rates paid by the industry should be combined with “additional measures to help unlock the late-life asset market and encourage exploration”, such as permanently removing all additional taxes from all discoveries made over the next five years, she said.

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

Research commissioned by Pinsent Masons, the law firm behind Out-Law.com, late last year found a high level of optimism from senior oilfield services and private equity firm executives about the long-term future of the UKCS. Almost all respondents said that they believed that the industry would ultimately recover to ‘peak’ levels of profitability, particularly once the full impact of energy policy reforms and new industry regulator the Oil and Gas Authority (OGA) began to be felt.