Industry calls for 'permanent' cut in UK oil and gas taxes

Oil and Gas UK is seeking a reduction from 50% to 30% on the rate of tax payable on production profits, along with the complete removal of petroleum revenue tax (PRT) payable on older fields. The government should also consider special reliefs on exploration and decommissioning as part of the 2016 Budget, it said.

"These rate changes, coupled with the existing first year capital allowances, are strongly aligned with HM Treasury's 'Driving Investment' plan for fiscal reform," said Mike Tholen, Oil and Gas UK's economic director. "The incentivising effect on investment and production in the long-term should render it of minimal cost to government."

"To bridge the gap between the 6.3 billion barrels of oil and gas on the [UK Continental Shelf] in which investment is already approved and the 20 billion that we estimate are out there, we must fight fiercely to attract global capital. That requires us to be attractive in cost, technology and fiscal terms and this year's Budget presents the perfect opportunity for the government to signal to investors its long-term ambition for the sector," he said.

The UK government cut 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. However, oil prices have continued to fall since then, and the industry's latest projections show that it is "no longer considered economically viable" to extract more than one billion barrels of the oil and gas reserves remaining in the North Sea.

Recent analysis by Oil and Gas UK recorded a slight increase in production last year, as well as a reduction in operating costs from an average of $29.30 per barrel in 2014 to an average of $20.95 per barrel in 2015. This is expected to fall still further during 2016 to around $17 per barrel, amounting to a 42% reduction in costs over two years. Oil and Gas UK said that this "robust industry response" had to be accompanied by a similar response from government.

"In such a mature basin like the [UK Continental Shelf] where special attention and expenditure must be directed at maintaining the integrity of oil and gas infrastructure, we know that strong and sustained investment does translate into higher production," said Mike Tholen.

"With investment approvals likely to fall to less than £1 billion this year from a typical £8 billion annually over the last five years, there is a real risk that fields due to cease production in the next five years will simply not be replaced by new projects. Lost production puts at risk hundreds of skilled jobs, billions of pounds of tax revenues and the UK's energy security. As a result, domestic oil and gas production is forecast to decline sharply beyond the end of this decade," he said.

A government-backed Loan Guarantee Scheme could be introduced to help out operators and contractors in immediate financial difficulty, while the government could also incentivise new exploration and production through targeted tax reliefs, Oil and Gas UK said. It has also called for changes to decommissioning relief to ensure that any guaranteed tax breaks would be passed on if the field was sold.

Research commissioned by Pinsent Masons, the law firm behind Out-Law.com, late last year found that senior oilfield services professionals were expecting a "surge" of company mergers and acquisitions over the next 12 months, driven in particular by the desire to expand internationally and acquire new technology.