Budget Day on 18th March brought some good news to the beleaguered North Sea oil industry. Chancellor George Osborne announced a package of measures, which the Treasury believes will provide £4 billion of additional investment over the next five years and increase production by 15% over the same period.
What the industry wanted
At present the oil sector pays a higher rate of Corporation Tax than other UK industries, with a so-called ‘supplementary’ levy of 30% added on. This had been raised from 20% in the 2011 Budget, when oil prices were much higher – averaging around $111 per barrel, compared to around $55 on Budget Day 2015.
Many in the UK oil industry were calling for the Chancellor to slash the supplementary tax to 10%, arguing that higher tax does not necessarily bring a government higher revenues (if an industry is declining the amount it pays in tax declines too). A cut in tax would actually increase tax returns, they claimed, because it would boost activity and recruitment along with long-term, productivity-raising investment.
What the Chancellor delivered
In the event, the Chancellor cut the supplementary levy from 30% to 20%, backdated to January, which as well as reversing the 2011 rise means that the UK’s headline tax rates for the oil industry are now the joint-lowest (with The Netherlands) in the North Sea. He also reduced from 50% to 35% the petroleum revenue tax (PRT), levied (on a field-by-field basis) on fields given development consent prior to 1993. This will help operators of the more mature North Sea fields, which were being taxed at the highest rates despite a drop in production and escalating costs.
He also announced a single, simple tax allowance, to be introduced in April, aimed at stimulating investment. For its part, the Government is to invest £20 million in new seismic surveys of the UK continental shelf.
Support for the oil industry will total £1.3 billion, according to the Chancellor, who acknowledged that bold action was necessary to safeguard jobs. Perhaps inevitably, he tried scoring a political point, suggesting that the measures would not have been affordable in an independent Scotland.
However, some oil experts have warned that the Chancellor’s concessions will do little to address the deeper structural issues facing the UK industry, and that the effects of OPEC’S actions on supply and price will ultimately determine the North Sea’s future.
Global oil prices have an impact on nearly every area of our lives. Although cheap oil has been the cause of much despair in Aberdeen, it has helped keep inflation down and push the UK Growth Forecast up, in turn helping to fund other Budget ‘sweeteners’ such as more generous savings allowances.
Whatever the UK economy has in store for us, Ex~i Flow continues to provide gas flow measurement and engineering solutions to operators around the world. To find out more about our services please call us on 01243 554920.