Quo Vadis – Budget 2015:

A further step in the right direction

Hannon Westwood welcomes the changes to the North Sea tax regime announced by the Chancellor on Wednesday, aimed at stimulating and prolonging investment in the UKCS. Significant and positive steps have been taken to relieve the overall tax burden and this will assist with counterbalancing the effects of the recent collapse in oil price and consequent job losses in the industry.

The key measures are: a ten percentage cut in the supplementary charge, effective from 1 January 2015 – a decrease from 30% to 20%, following a 2% cut implemented in the 2014 Autumn Statement; a cut in the rate of petroleum revenue tax (PRT) from 50% to 35% for PRT-paying fields as of 2016; a new UK Continental Shelf Investment Allowance aimed at simplifying the existing system of complex offshore field allowances. The new allowance will exempt a portion of profits equal to 62.5% of a company’s qualifying investment expenditure from the Supplementary Charge. It will be available for projects in new and existing fields, and will apply to investment expenditure incurred on or after 1 April 2015.

Whilst this is good and welcome news, what is lacking is any effective stimulus for exploration in the near-term. Falling exploration levels have resulted, unsurprisingly, in few commercial discoveries being made over the last few years such that the development hopper has not been replenished and investment levels, which have been high in the last 2-3 years, will still fall sharply despite the fiscal measures introduced by the Chancellor. The government needs to act to stimulate exploration; it gave an undertaking in the autumn statement to “consider options for supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable”, but is yet to deliver. The government did confirm the provision of £20m for seismic surveys, but while welcome, in isolation this will have little effect. Exploration is the lifeblood for the long-term future of the UKCS and more robust action is needed from both HMT and OGA including: an appropriate fiscal stimulus; state-sponsored pre-competitive geoscience in both mature and frontier areas (in addition to seismic acquisition); early release and more effective sharing of data and information; clarification of the remaining potential and prospectivity of the UKCS; and revisions to licensing policy to include a long-term strategy and regular but more focused licence rounds. These actions are necessary for the UKCS to become more competitive internationally for exploration.

Ian Norbury, Hannon Westwood CEO, commented “Of course, the measures announced by the Chancellor are positive steps which will help to encourage investment. But they form only the foundation for future progressive fiscal and regulatory changes, particularly to stimulate exploration, that are necessary to prolong the life of the basin and to maximise economic recovery”.

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