The UK government has unveiled further proposals to attract investment in the country's offshore oil and gas industry. But the proposals do not include any new immediate incentives beyond those announced yesterday.
"The government accepts that the overall tax burden will need to fall as the basin matures," it said today, after reviewing the long-term future of the oil and gas fiscal regime. "The trend towards smaller fields, higher costs and greater sensitivity to price fluctuations implies that typical UK offshore projects will struggle to attract investment in a competitive global environment."
UK finance minister George Osborne said in his Autumn statement yesterday that the rate of the supplementary tax charge on oil and gas production will be reduced to 30pc from 32pc from 1 January. The government "will aim to continue to reduce the rate further in an affordable way" that is consistent with its deficit reduction plans.
It added the ring-fenced expenditure supplement is being expanded from six to 10 years, and a new cluster area allowance, effective immediately, is being introduced.
Consultancy Deloitte estimated that the measures set out yesterday can give the industry a tax boost of about £90mn ($141mn) each year over the next five years.
Further steps announced today include consultations "on a basin-wide ‘Investment Allowance' to simplify and replace the existing system of offshore field allowances over time", with a consultation document to be published early next year.
The government will also "consider any more detailed proposals put forward by industry on mechanisms to support cash flow" for companies looking to invest heavily, but which unable are to obtain immediate tax relief.
It also promises to provide financial support for seismic surveys in under-explored offshore areas, "working with industry on options for shared funding models". Details of the plans will be set out in the budget next year.
The government said it will start discussions with the industry and the new Oil and Gas Authority (OGA), once its established next year, on "supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable."
Exploration activity offshore UK is at historically low levels, and less than 100mn bl of oil equivalent (boe) of economically recoverable reserves have been discovered in the last two years. The cost of each exploration well last year averaged £70mn, compared with £20mn or less for most of the 2000s, the government said.
"So although levels of Uk offshore investment reached record levels in nominal terms in 2013, in real terms investment is achieving rather less," according to the government.
Companies with stake in the UK North Sea have said the government should introduce exploration incentives similar to Norway's 78pc rebate, consolidate and simplify allowances or even introduce significant tax cuts to attract investment.
The government also said it will consider "options to improve access to decommissioning tax relief to encourage new entrants to the UK offshore region, where this does not increase the overall forecast cost to government of providing decommissioning tax relief, and consult further with industry in 2015".
If the new proposals unveiled today "can be implemented quickly, and a further tax rate reduction can also be delivered, the government has taken some critical steps to protecting the longevity of the oil and gas industry in the UK," said Financial services firm Ernst and Young senior partner Derek Leith. "However, with the low oil price making the need for reform acute, there is absolutely no room for complacency."
kr/et
Send comments to feedback@argusmedia.com
Request more information about Argus' energy and commodity news, data and analysis services.
Copyright © 2014 Argus Media Ltd - www.argusmedia.com - All rights reserved.
