Chancellor George Osborne (pictured) has thrown a bone to the North Sea oil industry in his Summer Budget speech today (8 July).
Osborne confirmed that the UK Government plans to broaden the types of investment qualifying for the Investment Allowance and cluster area allowances, as announced in his March annual Budget.
This will involve including certain discretionary non-capital expenditure and to include the costs of long term leasing of production units, with the aim of maximizing economic recovery. The draft secondary legislation to give effect to the extension of the investment and cluster allowances is intended to be published late summer / early autumn for technical consultation.
In a broader tax break, aimed at wider UK industry, the Chancellor also announced a phased 2% cut in corporation tax for non-ring fenced trade, which would benefit North Sea oil and gas businesses.
Over in Norway, the Norwegian government was reported to also be considering tax cuts to help support the offshore oil and gas industry there. The Norwegian offshore oil and gas sector generates about a fifth of Norway's gross domestic product, but has been hit hard by the low oil prices.
Even though global oil prices have climbed almost 30% from a six-year low in January, they are still about half their June 2014 peak. The drop in prices has sparked a halt in new projects and tendering and seen in excess of 150,000 jobs cut globally.
Trade body Oil & Gas UK welcomed Osborne's Summer Budget announcement, which came as industry had been calling for extra measures amidst falling oil prices, which has seen a huge halt in investment and thousands of job cuts in the UK. But, it said it was crucial measures were followed through as the industry battled the downturn.
Deirdre Michie, Oil & Gas UK’s CEO, said: “With continued signs that investment in the UK Continental Shelf is falling rapidly, it is vital the scope of the Investment Allowance, announced in the March Budget, encourages all forms of productive investment if it is to provide the strongest engine for growth. We are pleased to note that the Government has today taken steps to extend this allowance as they previously proposed and eagerly anticipate the required legislation by the end of the summer.
“In addition, the announced 2% cut in corporation tax over the next five years, will support companies throughout the sector’s supply chain and help its competitiveness.”
Michie said the industry is also playing its part to address the challenges it currently faces: “There is increasing evidence that big strides are being made to improve the efficiency and reduce the cost of operations. Lifting costs are anticipated to fall as a result over the next 12 months. The pace of work behind the scenes must now be stepped up to continue the implementation of fiscal reform the industry urgently needs to support its own activities to improve efficiency.”
Michie, added: “Whilst previous fiscal measures including the introduction of the Investment Allowance and reductions in the headline tax rates have been helpful, the agreed program of fiscal reform must also continue to respond to the prevailing business environment.
“HM Treasury had already proposed in the March Budget to consult on further measures to support exploration, improve access to decommissioning tax relief and reform the fiscal treatment of infrastructure and with the Summer Budget now behind us, it is imperative HM Treasury now commence these consultations to ensure the fiscal regime drives investment through the downturn.”
The rate of exploration on the UKCS remains extremely low, with just 14 exploration wells drilled in 2014, and only seven so far this year – at a time when industry should be aiming to drill upwards of 30 wells a year to reinvigorate the basin.
Michie also noted the work currently being done to stimulate exploration activity: “The industry is currently working closely with the Oil and Gas Authority (OGA) on technical measures to promote the discovery and development of prospects including the new seismic funded by HM Treasury, but this work alone will not allow us to turn the corner.”
Martin Findlay, partner and head of tax with KPMG in Aberdeen, said: “There is a clear indication from Treasury that it will continue to consult with industry and the OGA on additional fiscal measures to support the goal of maximising economic recovery in the UKCS. The Government’s commitment to the industry remains positive, but it is hard to predict at this stage how long it will take for new exploration to start in the UK sector, current market conditions being something that tax alone cannot deal with. The Chancellor cannot control global commodity pricing and many of the issues faced by the industry can only be addressed by the operators, service companies and the supply chain working in new ways that reflect today’s market conditions."
Andrew Speers, Managing Director, Petroplan, said: "It’s disappointing that there has not been further supportive action from the Budget announcement for the oil and gas industry in the UK. As a global recruitment specialist, we are finding that oil and gas professionals are more predisposed to leaving the UK to continue their career in this sector. The risk is that this talent, often in skill sets that are in short supply such as engineering, may build their professional life in other global locations. Furthermore, continuing to attract graduates and entry level talent into this sector may prove more challenging for employers committed to long term investment in the UK, which would have a further impact on the competitiveness of the UK oil and gas economy in the future."
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