UK unveils North Sea tax cuts: Update 2

Adds detail throughout

The UK government is sharply reducing taxes for the country's offshore oil and gas industry and introducing an investment allowance in an attempt to boost activity in the sector that has been squeezed by high costs, the heavy tax burden and lower oil prices.

"The fall in the oil price poses a pressing danger to the future of our North Sea industry unless we take bold and immediate action. And I take that action today," said finance minister George Osborne.

The supplementary tax charge on oil and gas production is being retrospectively reduced to 20pc from 30pc from 1 January, 2015. The move cuts the headline marginal rate of tax to 50pc.

The supplementary charge had been at 20pc before Osborne increased it to 32pc in 2011. It was cut to 30pc last December.

From next year, the petroleum revenue tax (PRT) will be reduced from 50pc to 35pc to support continued production in older fields and extend the life of key infrastructure. The move cuts a headline rate for PRT-paying fields to 67.5pc.

And from next month, "a single, simple and generous tax allowance" will be introduced to stimulate investment "at all stages of the industry", Osborne said. The new investment allowance will cut the amount of adjusted ring fence profits subject to the supplementary charge. "The portion of profits reduced by the allowance will be dependent on a company's investment expenditure and will be generated at 62.5pc of that spend," the government said in its annual budget.

The government will also invest £20mn ($29mn) in new seismic surveys in underexplored areas offshore the UK. And although it did not introduce an allowance similar to the 78pc exploration tax refund in Norway, industry group OGUK chief executive Malcolm Webb called the seismic incentive "a very positive step".

"This is a long-term package we have been working in conjunction with the industry on," Treasury minister Priti Patel told Argus. She added that by cutting the PRT "we have gone further" than what the companies were asking for.

In total, the announced tax cuts amount to £1.3bn of support for the industry between their introduction and the end of the decade, Osborne said.

"Together these measures are expected to lead to over £4bn of additional investment and at least 120mn bl of oil equivalent of additional production in the next five years, boosting oil production in 2019 by 15pc, equivalent to around 0.1pc of GDP," the government said. "This will provide certainty for investors and create the right conditions for the basin to flourish and deliver maximum economic benefits for the UK."

OGUK welcomed Osborne's "decisive move to restructure the North Sea tax regime", calling it "both sensible and far-sighted".

"Today's announcement lays the foundations for the regeneration of the UK North Sea," said OGUK's Webb. "The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness."

OGUK said last month that investment in the UK offshore could fall by one third this year and by more than 80pc in 2018 from last year's £14.8bn because of high costs and taxes.

"Despite the difficult oil price environment, hopefully this is enough to stimulate additional investment," consultancy Deloitte's global oil and gas tax leader Julian Small said about the government's announcement. "The next year will be pivotal for the long-term future of the North Sea."

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