CW Energy LLP

Autumn Statement 2014 – Oil and Gas tax measures

Following the announcement of immediate changes to the regime in the Autumn statement, the Government announced today the results of the fiscal review discussions and their proposals to make changes to the regime designed “to support the government’s twin objectives of maximising the economic recovery of hydrocarbon resources whilst ensuring a fair return on those resources for the nation”.

There were nearly 60 respondents to the call for evidence and the Government have summarised those responses in their paper published today called “Driving investment: a plan to reform the oil and gas fiscal regime” in which they also set out a number of further proposals to take forward next year.

The aim of these proposals is summarised by Treasury as committing the Government to:

  • Introduce a basin-wide ‘Investment Allowance’ to reduce the effective tax rate further for those companies investing in the future of the UKCS. A consultation on this proposal will be published in early 2015.
  • Introduce financial support for seismic surveys in under-explored areas of the UKCS, working with industry on options for shared funding models. Stakeholders will be engaged to discuss this and details will be set out at Budget 2015.
  • Work on options for supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable. The government will open discussions with industry and the new Oil and Gas Authority in 2015, with further consultation with industry.
  • Develop options to improve access to decommissioning tax relief and work with the Oil and Gas Authority to consider options for reforming the fiscal treatment of infrastructure, with further consultation with industry in 2015.

So despite the current low oil prices there are no plans to make any immediate radical changes to the existing regime which remains in place subject to yesterday’s proposed changes.

We will need to wait until we see the detailed consultation documents but our initial thoughts are as follows.

As a general comment, while the proposals are referred to by Treasury as a radical plan to reward investment, we see them more as tinkering at the edges, and are not convinced that they are sufficiently radical to achieve the objectives set out by Government.

The drastic rise in the SCT rate from 20% to 32% in 2011 was a political move to raise much needed cash whilst limiting increases in fuel duty and a reaction to the rise in oil price from around $70 per barrel to over $100. However in the current proposals there appears to be no commitment to link the rate of SCT to profitability and the 2% reduction announced yesterday leaves the industry in a world which is significantly less attractive than where it was at the time of the 2011 changes.

However along with the token 2% cut in the rate of the Supplementary Charge there is a commitment to reduce the rate of Supplementary Charge “over time” when affordable. Of course one of the consequences of a cut in SCT rates (as opposed to a cut in the rate of ring fence CT) is that it dilutes the value of the field allowances, and will not help current developments which are sheltered from SCT by field allowances.

Although the Government acknowledges that the scheme of field allowances introduced in 2009 has been successful in its aim of promoting investment, they have highlighted the complexity, uncertainty and distortions that the current regime has introduced and are therefore proposing a move to a more straightforward “Basin Wide” investment allowance.

A basin wide investment allowance, while welcome, does not appear particularly well targeted to investments more in need of assistance, meaning that in a resource constrained environment there is less help available for where it is most needed. It would however generate much needed certainty about the tax reliefs that will be available (subject to future changes in law) when an investment decision is first made.

The proposed targeted relief for seismic surveying is likely to assist smaller players and is an area where the cost to Government in providing some upfront relief may be more manageable in the current economic climate.

As there are existing mechanisms for enhanced tax relief for North Sea costs, providing an exploration tax credit presumably would mean some form of cash refund for companies in the exploration phase. This would be a welcome measure for companies which are currently not tax paying. However the relief is going to be highly targeted and clearly not going to be generally available. Until we have a better view of the targets it is difficult to know whether this will have the significant impact needed to improve levels of exploration.

Similarly, given the already extensive CT loss relief rules for decommissioning, the commitment to improve access to decommissioning tax relief is interesting. We presume the Government are thinking of a PRT-style loss carry back to previous owners who might have more CT capacity than the existing owners, to help encourage new entrants. How this would work in practice could however be problematical as previous owners who have retained significant North Sea interests may wish to retain access to all or part of their past capacity. However it is a positive step that Government have recognised that the lack of tax capacity is a real concern and a continuing impediment to assets being transferred.

Reforming the fiscal treatment of infrastructure is long overdue and the case for reform cannot be more pressing giving ageing infrastructure with high running costs given the current low oil prices

With regards to PRT Government have acknowledged that most respondents who commented on this issue suggested a move towards a 0% rate of PRT was desirable. However they have concluded that this would not be the most efficient use of resources. They have nevertheless given an undertaking to keep the rates of PRT “under review”.

We feel it is unlikely that there will be any significant changes to the PRT regime in the near future except possibly in respect of infrastructure taxation as mentioned above, given that the major part of this infrastructure is currently within the scope of PRT. While some changes are clearly needed to the PRT regime as it applies to infrastructure we believe that there are better, targeted ways of achieving this rather than across the board rate reductions.

Hopefully more radical changes will result from the discussions planned for 2015. For the moment however it seems a case of “jam tomorrow”.

What is clear from this announcement, and has been evident in previous reviews (of which there have been many), is that there are a large number of diverse interests in the industry influenced by each company’s particular portfolio. This means that it has been difficult for the industry to speak with a single voice, and no doubt this will continue, with those who are able to shout the loudest perhaps having the greatest success in bringing about change.

It is however hoped that Treasury will be able to see through this and introduce a regime that will give the best result for the industry as a whole. We can only wait and see.