UK oil sector boosted by Budget tax cut and new investment allowance

Announcing the country’s first comprehensive overhaul of hydrocarbon taxation since 1993, Chancellor George Osborne said the petroleum revenue tax (PRT) will be slashed from 50% to 35% to support investment in older fields.

The supplementary charge will also be cut from 30% to 20% and backdated to January. It follows an earlier reduction from 32% to 30% announced in Osborne’s Autumn Statement last December.

Assigning a value to the taxation overtures, the Chancellor said the tax cuts were worth a total to £1.3bn to the industry and, with a new investment allowance "to stimulate investment at all stages of the industry life cycle", would lead to over £4bn of additional investment and at least 120m barrels of extra oil equivalent in the next five years.

The move is likely to boost North Sea oil production by 15% by 2025, according to the Office for Budget Responsibility.

“From March, there will be a single, simple and generous tax allowance to stimulate investment at all stages of the industry. There will be new seismic surveys in under-explored areas of the UK Continental Shelf,” Osborne told the House of Commons.

Overall, the move represents a 10% headline cut that reduces the cumulative taxation on UK exploration and production from 60% to 50%. It follows intense lobbying by industry lobby group Oil & Gas UK (OGUK) which had called upon the Chancellor to stem the North Sea’s decline as the oil price slump dented offshore activity.

Since July 2014, Brent, the global proxy oil benchmark has shed 50% of its value and is fetching $53.18 per barrel at 14:30 GMT. In its response, OGUK welcomed the move, saying the budget had laid strong foundations for regeneration of the North Sea.

The Confederation of British Industry (CBI) also welcomed the move. Director General John Cridland said, “The oil and gas industry, which supports 450,000 UK jobs and is a major contributor to GDP, has been given a much-needed boost.

“This will help address concerns over job losses and investment freezes, but pressures remain due to low oil prices.”

Derek Leith, head of oil and gas taxation at Ernst & Young, said the budget reversed Osborne’s tax increase of 2011. “It’s also a move towards simplification of the regime with the introduction of a cost-based investment allowance. The PRT rate reduction is an additional boost for the most mature North Sea fields which have been taxed at a marginal rate of 81% despite falling production and rising integrity costs.

“As these fields typically host key pieces of North Sea infrastructure lowering the overall tax rate for these fields is vital. Whilst some in industry may have hoped for a more significant cut in the headline rate there was little likelihood of that happening,” Leith concluded.

However, green lobby groups criticised the move. A spokesperson for Greenpeace said, "There is no point fooling ourselves that North Sea oil has a long-term future."

"Ministers should make sure subsidies given to declining industries are smoothing the shift to a greener and more energy efficient economy, and not wasting taxpayers’ money in a futile attempt to turn back the clock."

On a related note Osborne also froze petrol duty by scrapping an increase planned for September. The Chancellor claimed it would leave “every motorist £10 better off each time they fill up their car."