UK government to review North Sea oil and natural gas tax regime

14 July 2014 13:11 Source:ICIS
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In view of declining tax revenue from the oil and natural gas industry, the UK Treasury is exploring how the country’s tax regime could be changed to encourage new investment in the North Sea.

The ministry on Monday invited oil and gas companies operating in the UK’s part of the North Sea to share their views on the future of the oil and gas tax regime as part of a government-led 12-week consultation.

The Treasury added that it aims to help maximise the value of the country’s oil and gas resources, whilst ensuring that “the nation continues to receive a fair share of profits”.

It launched the consultation against the backdrop of around 21 billion barrels of oil equivalent (boe) still being believed untapped in the UK part of the North Sea.

Oil and gas companies operating in the North Sea are taxed at higher rates than other companies. Marginal tax rates stand at 62% or 81% – significantly higher than the standard corporation tax rate which is currently 21%. Between 2013 and 2014, £4.7bn was paid in upstream taxation in the UK.

At the same time, the government has introduced a number of tax relief measures to encourage investment, particularly in North Sea fields that are smaller or harder to access. These “field allowances” unlocked £7bn of new investment last year, according to the industry.

Competition for capital

There are currently some 300 offshore oil and gas fields in production which still provide nearly 40% of the UK’s primary energy needs. However, exploration and production is becoming more difficult and expensive, with the UK facing competition for capital.

Despite current record investment rates, there are signs that investment will halve over the next four years, according to the trade association Oil & Gas UK, which has come out in support of the government’s consultation.

“The current fiscal regime has become increasingly complicated and unpredictable with high tax rates combined with a multiplicity of allowances,” Michael Tholen, Oil & Gas UK’s economics director, said.

“While targeted allowances have successfully encouraged a wave of activity in recent years, temporarily halting the production decline, their impact is diminishing in an ever more expensive business climate. Investors are increasingly looking to invest elsewhere rather than in the UK,” he added. Kirsty Ayakwah

By kirsty ayakwah