Desperate measures

Author Konstantin Rozhnov

Desperate times call for desperate measures — even if they include agreeing with your opponent on pretty much everything.

Desperate times call for desperate measures — even if they include agreeing with your opponent on pretty much everything.

The Scottish and UK governments argued for months over the prospects of the ageing North Sea oil and gas industry in the run up to last year’s referendum on whether Scotland should leave the UK. London was accusing independence proponents of exaggerating the economic potential of the North Sea, while Edinburgh was blaming the UK government for hurting investment with unexpected tax hikes and bad stewardship.

Scotland voted in September to stay within the UK, maintaining London's overall control of the North Sea oil and gas sector. Since then, global oil prices — which had already been in decline — have collapsed to below $50/bl, compared with $115/bl in June.

Consultancy Wood Mackenzie sees $3.2bn, or £2bn, of expenditure associated with pre-sanction projects potentially at risk over the next two years as a result of the recent oil price fall. The UK government announced a set of new incentives in December to boost the country's offshore oil and gas industry. They include a proposed investment allowance “to hugely simplify the existing regime of field allowances”, a commitment to boost offshore exploration, and a reduction of the supplementary tax charges on oil and gas production to 30pc from 32pc as of this month, “with an aim to reduce the rate further in an affordable way”. The government increased the charge in 2011, from 20pc to 32pc.

And while London and Edinburgh continue to exchange blows in the wake of the September referendum —with Scotland talking about “a dreadful record on tax”, and the UK government pointing to “an £18.6bn black hole” — they seem to agree in principle on what and when needs to be done to help the oil and gas industry.

The UK government indicates it may further ease the tax burden on the sector in its annual budget in March, but does not provide much detail.

The Scottish government is a little bit more specific. Its minister for business, energy and tourism, Fergus Ewing, calls for a phased return of the supplementary charge to 20pc and for the introduction of an exploration tax credit, “along the lines of the system used in Norway”, where the government refunds up to 78pc of exploration expenses. He also supports the new investment allowance idea.

“Combination of these three measures would be part of what is necessary to maintain and in some cases restore confidence in the sector,” he said in London yesterday, adding that the Scottish government is “heartened” by the fact that the UK government has recognised the necessity of “tax measures”.

Furthermore, London and Edinburgh have high hopes for new regulator Oil and Gas Authority and its chief executive Andy Samuel. And both sides seem to agree that the time for action is running out, with the industry sharing this view.

“Evidence of the threat from the falling oil price to UK investment and jobs is mounting daily with oil and gas companies cutting exploration and capital budgets and reviewing headcounts,” according to industry group OGUK’s chief executive Malcolm Webb.