Comment: Tax-friendly regime key to North Sea oil

North Sea supplies are dwindling – that much is not disputed – but it does lie at the root of the tug-of-war being fought over control of the assets.

First Minister Alex Salmond has built his independence campaign around forecasted revenues and the rights that an independent Scotland would have over North Sea oil and gas. Prime Minister David Cameron believes the North Sea needs the “broad shoulders” of the UK to provide the necessary level of support for investment. Two important reports already published this week have brought all of this into sharp focus, specifically how to exploit what is left.

Sir Ian Wood wants an independent regulator to control licensing and to knock industry heads together in order that companies share costs and know-how. This has been accepted by both political camps and yesterday, a report from Oil & Gas UK, revealed just why such co-operation is needed.

Production and investment this year should be the second highest on record, but exploration over the past three years has been at its lowest in the history of the UK continental shelf (UKCS). It concludes that the industry is facing its biggest challenge in 50 years.

There is merit in Salmond’s argument that the UK’s jurisdiction of the industry has been one characterised by constant changes of minister and an inconsistent tax regime.

Among them, Chancellor George Osborne’s tax raid in 2011 was poorly-judged and, not surprisingly, reversed.

If Salmond could guarantee stability on ministerial appointments and tax levies, he would win some plaudits in an industry that requires long-term certainty.

But he cannot give guarantees on supplies, or supplies that would be economically viable. Not only is the industry vulnerable to fluctuations in global prices, the physical task of extracting the oil is becoming more difficult and, therefore, more expensive.

Oil companies’ margins are put under greater pressure, prompting a judgment call by them on whether to invest in the region or elsewhere.

Sir Ian’s report is a timely and sensible wake-up call for the sector and it would have been inexplicable if either Salmond or Cameron had rejected it.

Whichever government gets their hands on the pumps, it will have little choice but to incentivise explorers by creating a more conducive tax regime around North Sea oil and gas.

Salmond has accused the UK government of using North Sea oil and gas as a “cash cow”, but as it would be core to underpinning an independent Scottish economy it would be more difficult for him than his Westminster counterpart to cut taxes.