Comment: Pragmatism enters North Sea tax debate

Martin Flanagan

Martin Flanagan

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THE 30 per cent slump in the oil price this year has concentrated a lot of minds. Perhaps not least, President Putin, given that Russia is largely a one-trick pony, economically speaking, of energy and mineral resources exports.

Even without the West’s sanctions in retaliation for Russia’s revanchist moves in the Crimea and Ukraine, that oil price tailspin is now causing real damage for the country.

But, closer to home, it seems likely to have also been a factor in the UK government reaching a tipping point – where it deems lighter taxation is now called for related to North Sea energy fields, something the oil and gas industry has been arguing for continually to little effect.

In his Autumn Statement on Wednesday, Chancellor George Osborne announced that a supplementary charge on oil companies’ profits in the North Sea would be cut to 30 per cent from 32 per cent.

The reduction does not change the fundamentals of production in the basin. The glory days are past. We didn’t squander the proceeds. But neither did we build up a highly successful sovereign wealth fund like Norway from the oily fruits.

Projects now will be smaller, and the recovery of fuels more difficult. That puts pressure on the projected financial returns of both nippy independent explorers and energy giants like BP and Shell,

Companies will therefore scrutinise projects on the UK Continental Shelf (UKCS) much more closely against the financial attractiveness of projects elsewhere around the world.

If lower oil prices, particularly with the burgeoning fracking industry, become the norm it can only drive that mentality. Even if the cut in the supplementary charge is only a first step, it is significant in that it is the first reduction in tax rates for the North Sea in more than two decades.

It indicates that the government recognises the tectonic plates are shifting in the worldwide energy industry, and that Whitehall’s dial has moved accordingly away from just wanting to maximise UKCS oil and gas revenue towards wanting to ensure greater recovery of the remaining oil and gas assets.

A UK government report launched in Aberdeen yesterday by the Chief Secretary to the Treasury, Danny Alexander, says there remain “significant hydrocarbon reserves” in the area.

But the fiscal regime has to be changed to get companies to invest in pumping them out. Further cuts in the supplementary charge should be enacted to mirror the wider corporation tax cuts over the past decade to encourage business investment.

A further welcome move by the government is to allow oil firms to offset their exploration costs against future production for up to a decade instead of the current six years.

The government is also looking at shared private/public sector funding for new fields in under-explored areas. Greater accessibility to tax reliefs on decommissioning oil rigs is to be examined.

In short, a new pragmatism looks to have become the government touchstone in deciding what it wants from the North Sea and how to protect it, rather than myopically treating it as a golden goose to be continually squeezed.

As a secondary effect, the budget changes will also have positive ripples for the Aberdeen economy – already one of the most prosperous areas of Scotland. This is no sudden Damascene conversion of government to all the warnings of the energy industry. But the template for future discussions has changed.

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