Demand for new North Sea oil tax regime as industry 'hanging in the balance' due to 38% levy
The North Sea’s oil and gas future “hangs in the balance” and requires a tax regime that provides greater long-term stability, new research suggests.
In its analysis of the mature sector, Wood Mackenzie - the Edinburgh-founded energy consultancy - argues that the UK government must implement a more predictable fiscal regime “as soon as possible”.
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Hide AdWhile ministers acknowledge that oil and gas production will be required for decades to come, recent and proposed modifications to the Energy Profits Levy (EPL) have created “unparalleled sector uncertainty and consternation”, the report notes. The EPL is a “temporary” levy, due to rise from 35 per cent to 38 per cent on November 1, running until March 2030 and applied to the extraordinary profits of oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS).
Wood Mackenzie – known widely as WoodMac – notes that a system that is equitable to both government and industry would be “challenging to design”, but essential to ensuring clarity before the impact on investment in what is a mature, transitioning sector becomes “irreversible”.
Details of the planned changes to the Energy Profits Levy will be confirmed in the UK Budget on October 30. The Chancellor’s fiscal set-piece could also specify the timeline for establishing the successor to the EPL.
Graham Kellas of Wood Mackenzie said North Sea oil and gas operators were trying to make long-term financial decisions beyond 2030, yet the current fiscal regime does not provide such clarity.
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Hide Ad“Price responsiveness, predictability, fairness, simplicity and transparency must all be considered to ensure the correct outcome is reached at what is a crucial juncture for the sector,” he said. “This will be a difficult conversation, with the mechanisms required for an improved system complicated by having to negotiate the myriad of economic outcomes and investor types. But this must be tackled, and a solution found, quickly.
“Achieving consensus on the issues will be highly challenging, not just between industry and government, but between the companies themselves. And there are potential conflicts between the objectives, such as simplicity versus fairness and responsiveness versus transparency.
“The consultation will be far from easy,” Kellas warned, “but there are some shared objectives and where there’s a will, there’s a way.”
Wood Mackenzie notes that for a predictable tax system to be introduced, government and industry engagement must address several challenges including defining a price “shock” and its duration, determining the appropriate government share to apply during that shock and deciding whether to target only excess income or apply a measure to a company’s entire taxable income, as is current practice.
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