North Sea oil exploration incentive scheme launched

A review of the fiscal regime for the oil and gas sector was announced in this year’s Budget, with a new Treasury report saying “significant change” was needed in order to continue to attract investment.

Chief Secretary to the Treasury Danny Alexander launched the new report as he met key industry figures during a visit to Aberdeen today.

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There is still “significant hydrocarbon reserve” in the UK Continental Shelf (UKCS), the Government said, which could “generate significant benefits for the UK” if it can be recovered.

It estimated there could be up to 21 billion barrels of oil equivalent remaining offshore, and the report said industry experts believe some 15 billion to 16.5 billion barrels are economically recoverable.

The UK Government’s response to the review said: “Offshore production will continue for many decades to come.”

But it added that operators in the UKCS are “facing strong competition for scarce investment whilst the economics of the basin have changed fundamentally”.

It said there were also “opportunities to simplify the fiscal regime to provide greater certainty, lower administrative burden and fewer distortions”.

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The report continued: “The Government’s view is that current levels of investment cannot be maintained without fiscal change. The trend towards smaller fields and higher costs implies that typical projects in the UKCS will struggle to attract investment in a competitive global environment. Now is the time to make that change to ensure the UKCS can compete for global capital.

“This document therefore sets out a radical plan for reform of the fiscal regime. The reforms are 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.”

Key in the reforms is an immediate cut in the rate of the supplementary charge on oil industry companies’ profits, from 32% to 30%, which was announced by Chancellor George Osborne in his Autumn Statement yesterday.

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The UK Government also plans to introduce an investment allowance, which it believes will reduce the effective tax rate further for companies investing in the North Sea.

Financial support will be provided for surveys in under-explored areas of the UKCS, with the Government to work with the industry for options on shared funding.

Meanwhile, options to improve access to decommissioning tax reliefs are to be developed

“Together, these measures represent a radical plan to reward investment in the UKCS at all stages of the industry life cycle,” the Treasury report said.

“These reforms will make the fiscal regime more competitive, simpler and more predictable, and represent the most balanced and investment-focused way to move to a lower tax burden over time. They will support billions of pounds of investment throughout the life cycle of fields.”

But it stressed: “Action by Government must be matched by action by industry and the Government expects the industry to make significant improvements in production operations, in improving its cost-efficiency and in commercial practices in line with the objective of maximising economic recovery.”

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The new industry regulator, the Oil and Gas Authority, will be asked to monitor and report on the sector’s progress in these areas.

Mr Alexander hailed the North Sea oil and gas sector as being “one of the country’s greatest industrial success stories”, stating: “It remains the largest industrial investor, provides just over half of the UK’s primary energy needs and supports hundreds of thousands of jobs.”

But in the foreword to the report, he said: “The oil and gas remaining is becoming increasingly difficult and expensive to extract and shifts in the global oil and gas landscape may make it harder to continue to attract global capital without substantial improvements in the fiscal and regulatory landscape.”

He said that was why the Chancellor had announced a review of the fiscal regime for the industry, and added: “This document sets out the conclusions of that review: a radical plan to reward investment in the UKCS at all stages of the industry life cycle.

“It recognises that to maximise investment we need to reduce the overall tax burden facing the industry, and sets out long-term principles for the future that we believe the Government and industry can both buy into as well as specific actions to ensure a more competitive, simple and predictable fiscal regime.”

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