The Chancellor delivered the Autumn Statement 2023 today. We summarise below the announcements that were made on the specific rules that apply to UK upstream oil and gas companies.
Energy Security Investment Mechanism (‘ESIM’)
The Government announced today that the ESIM, through which the Energy Profits Levy (EPL) will be terminated early in the event oil and gas prices fall below a threshold, will be legislated. It also clarified how those threshold prices would be measured.
The ESIM was announced earlier this year without any undertaking to legislate the termination of the EPL. Today’s announcement reflects the industry’s request for certainty.
The ESIM will trigger the abolition of EPL from the last day of the 6-month rolling reference period when both oil and gas average prices in the six months have fallen below the threshold.
The announcement clarifies the pricing sources and the methodology for arriving at the average.
Currently, the threshold prices are $71.40/barrel for oil and £0.54/therm for gas. These threshold prices will be indexed annually from 1 April 2024 using the preceding December’s Consumer Prices Index.
Outcome from the Oil and Gas Fiscal Review
During the Summer, the government conducted a review of oil and gas taxation. The outcome of this review and summary of responses was published today. There are two main areas covered being:
- Tax regime design for oil price “shocks”; and
- Payment to decommissioning funds and tax treatment of assets repurposed for Carbon Capture, Usage and Storage (‘CCUS’)
Tax regime design for oil price “shocks”
The government stated that it was recognised that there was a need for certainty and predictability in the oil and gas fiscal regime. But also noted that in periods of high oil prices the nation needed a “fair return”. Therefore, where there are “unusually high oil and gas prices the government will develop a new mechanism that could be used to respond to such price shocks post-2028”. The government have given an undertaking to provide details of how “price shocks” are to be defined before EPL is abolished.
The government is signalling that they understand that the introduction of the EPL was a “shock” tax rate rise and was not helpful for the industry, stating that the mechanism should work in a “more predictable way, in order to not deter investment”.
There are no details on how such a mechanism could be framed but that the “government will need to consider a range of factors before deciding whether to introduce such a mechanism, including the economic and fiscal context of the day.”
Outside of these high oil price periods, the review stated that the government considered the tax regime to be effective with limited scope for simplification changes.
Payment to decommissioning funds and tax treatment of assets repurposed for CCUS.
At Spring Budget 2023, it was announced that legislation will be introduced in a future Finance Bill that will establish “the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects”. At that time, there was no further detail included, so it was not clear what tax treatment is being proposed.
At Autumn Statement, it was announced “targeted support for the energy transition through allowing relief for payments made by oil and gas companies into decommissioning funds in relation to oil and gas assets that are repurposed for use in Carbon Capture Usage and Storage”. The support consists of two measures:
- Provides for tax relief where oil companies make a payment to a decommissioning fund. Under current law, relief is only available at the time that decommissioning expenditure is incurred when the decommissioning work is carried out, and
- Remove from the charge to EPL any “receipts” that are received when an asset is repurposed for use in a CCUS project. Receipts will remain subject to RFCT and SCT.
It was noted that the government “did not receive sufficient evidence on any other significant barriers to the energy transition in the oil and gas tax regime in order to justify further changes in the oil and gas tax regime” but acknowledged this will be kept under review.
This leaves repurposed CCUS assets subject to a 40% clawback.
Comment:
Legislating the ESIM is a welcome response to the industry’s concerns, but for those companies anticipating EPL losses to be used on carry-back, an early end to EPL will deny them relief. It is disappointing that the government has rejected the request by industry for the thresholds to reflect indexed historical prices.
The Oil and Gas Fiscal Review has not provided anything tangible at this stage with respect to the design mechanism for oil price “shocks”, and therefore, the industry will need to continue to engage in shaping the design of any mechanism. Many will be comforted that the current fiscal regime has been found to be effective so that there appears to be limited risk for further changes.
The CCUS announcement leaves a potentially significant roadblock in place where an asset is sold, and receipts are still to be subject to 40% taxation. Perhaps further changes may be acceptable to the government as the precise framework of the CCUS contracting structures is further developed.
CW Energy LLP
November 2023