UK Chancellor of the Exchequer George Osborne has announced significant tax cuts to help “one of the most important and valued industries” in the country in his Budget speech Wednesday. The measures include halving the Supplementary Charge on oil and gas and the effective scrapping of Petroleum Revenue Tax.
“The oil and gas industry employs hundreds of thousands of people in Scotland and around our country. In my Budget a year ago I made major reductions to their taxes but the oil price has continued to fall so we need to act now for the long term,” he said.
“I am today cutting in half the Supplementary Charge on oil and gas from 20 percent to 10 percent, and I am effectively abolishing Petroleum Revenue Tax too, backing this key Scottish industry and supporting jobs right across Britain.”
Taking a swipe at Scottish Nationalists in his speech, Osborne said that the tax cuts, which will be backdated to be effective from Jan. 1, were only possible due to the fact that Scotland decided to stay in the UK.
“We are only able to provide this kind of support to our oil and gas industry because of the broad shoulders of the United Kingdom. None of this support would have been remotely affordable if in just eight days' time Scotland had broken away from the rest of the UK as the Nationalists wanted,” he said.
“Their own audit of Scotland's public finances confirmed that they would have struggled from the start with a fiscal crisis under the burden of the highest budget deficit in the Western World. Thankfully the Scottish people decided that we are better together in one United Kingdom."
Osborne’s tax relief for the oil and gas industry follows calls from the Aberdeen & Grampian Chamber of Commerce to make further tax cuts to lengthen the lifespan of the North Sea oil sector. Industry trade body Oil & Gas UK had also called for fiscal reform before the Budget and claimed that the UK oil and gas sector needed urgent tax reform in order to boost the industry’s competitiveness and investors’ confidence in the UK continental shelf. Osborne also provided a boost to businesses in general in the UK, including oilfield services firms, by cutting corporation tax by one percentage point to 17 percent.
Following Osborne’s comments, shares in British oil firms, including Cairn Energy plc, John Wood Group and Tullow Oil plc, extended gains and were up 2.7 to 3.6 percent.
A number of organizations associated with the oil and gas industry responded in the following ways to the latest tax cuts:
“Today’s announcement does indeed mark further progress in modernising the tax regime for an increasingly mature basin. We welcome these measures as they will build on the industry’s achievements in improving efficiency in the face of low oil prices, boosting the sector’s competitiveness and helping to restore investor confidence. We will continue to work with the Treasury to complete its ‘Driving Investment’ plan to ensure that the fiscal regime reflects the business needs of a maturing basin and signals to global investors that the UK is truly open for business.” -Oil & Gas UK Chief Executive Deirdre Michie
“We asked the Chancellor for a minimum of 10 percent percentage point cut in the headline corporate tax rate for the oil and gas sector, as well as the zero-rating of Petroleum Revenue Tax. Today’s Budget announcement show that the Chancellor has listened to our members and made changes to the fiscal conditions to build confidence in a world class industry. We still have to examine the detail but it seems that our hard work has been successful in persuading the Government to deliver reforms that reflect the basin’s mature status. The first step is where all journeys begin, and the Government has made that step as part of what is hopefully a long-term strategy to ensuring that we have the most competitive tax environment in the world.” -Aberdeen & Grampian Chamber of Commerce Research & Policy Director James Bream
“I’m pleased the Chancellor has caved to SNP pressure and has revised the level of tax for oil and gas companies but he has only cut the total amount of tax from 50 percent to 40 percent while cutting corporation tax for other companies to 17 percent. This is a missed opportunity and shows the Chancellor lacks the vision to bring forward a long-term strategy for the North Sea Oil and Gas industry and he has failed once again to introduce measures that would encourage exploration. The Chancellor has failed yet again to bring forward any proposals on non-fiscal support such as loan guarantees which would help sustain investment in the sector and help companies to protect jobs. The SNP government is committed to doing everything within its power to support the oil and gas industry during these challenging times through the Energy Jobs Taskforce - which includes £12 million ($16.9 million) in funding to help oil workers retrain in other fields - and an additional £379 million ($534 million) investment in the north east of Scotland. But while the Scottish Government has taken action the Chancellor has simply sat back and rested on his laurels so if there is one thing that is clear from today’s Budget, it’s that far more could have been done.” -Scottish National Party spokesperson for Energy and Climate Change Callum McCaig MP
“The reductions in headline tax rates for the oil and gas industry announced by the Chancellor, backdated to the start of 2016, are welcome and will help to create a more attractive fiscal framework for this strategically significant industry. In the medium to long term, this should make a positive contribution to the maximising economic recovery agenda for the UKCS. However the headline GBP 1 billion ($1.4 billion) of tax impact is the total over five years, with the relatively modest annual impact being a direct result of relatively low tax take... However, tax reductions in themselves can only ever be part of the solution, particularly in the short term when the prevailing market conditions are forcing the industry to address its operating models and cost base with significant collateral damage. Maximising production from UK oil and gas fields will only be achieved by reducing unit cost of production and driving through operator and supply chain efficiencies, no matter how painful these are. The industry must therefore continue to pursue sustainable cost reduction measures and new ways of working and collaborating, which will better position it to maximise the North Sea opportunity when the commodity price recovers.” -KPMG Aberdeen Senior Tax Partner Martin Findlay
"The tax cuts are a welcome development for the industry but the government's action may be a case of too little, too late for some companies. There is an ongoing need for the government to engage with industry on a proactive basis to mitigate the effects of a 'lower for longer' oil price." -Law firm Ashurst’s Energy Partner Michael Burns
"Oil and gas companies operating in the North Sea have been lobbying for substantial tax cuts to support their activities. It remains to be seen whether the reduction in the supplementary charge to 10 percent and the effective abolition of petroleum revenue tax with effect from 1 January 2016 will be enough." -Ashurt’s Tax Partner Nicholas Gardner
“Today’s announcement will go some way to support the North Sea oil and gas industry and reverse some of the cost challenges the government had previously levied. However, there is still a major risk that the industry will continue to lose talent, skills and expertise to other sectors. It remains to be seen if these tax cuts will protect or create jobs for the North Sea.” -Recruitment company Airswift’s CEO Peter Searle
“We welcome the Chancellor’s tax incentives for the North Sea announced in today’s Budget, which show a continued dedication to the viability of the region. Changes to the Petroleum Revenue Tax are welcome, though we see them as only benefitting the industry’s larger oil companies who are still operating the larger, more mature fields. The supplementary charge reduction will be more encompassing and while we would have rather seen it fully reduced to zero, we wholeheartedly welcome the decrease. The investment in further seismic surveys shows a confidence in the UKCS, although this will only have a longer-term impact on exploration and will not support the sector in the short term…At IO, we combine consulting and engineering expertise to take a holistic view of projects to ensure a positive FID. We look forward to working with the industry to provide certainty in the upstream sector and act as a catalyst for operators and contractors to collaborate for a brighter industry future. IO is working hard technically, commercially and financially to accelerate further developments in the North Sea.” -Chris Freeman, Director of Field Development, IO Oil & Gas Consulting Field Development Director Christ Freeman