A disturbing Budget
April 2011
By Mike Tholen, Oil & Gas UK's economic director
In this edition of Wireline, I had planned to tell you how, according to our annual Activity Survey, the UK continental shelf (UKCS) was in the midst of a renaissance, how the diverse range of companies that have been attracted to invest in the UK’s oil and gas province were supporting the economy’s path out of recession and were poised to do so for many years to come.
Despite this being a mature and relatively high cost province, our forecasts showed that our oil and gas company members had a new and growing confidence in the stability of the UK regime and as a result were investing £8 billion this year and had plans to invest £40 billion or more over the next five years in order to develop more of the UK’s oil and gas reserves.
One impact of this increasing investment would be a significant reduction of the production decline rate over the next five years. This, I felt, was important because, in a time of economic difficulty and uncertainty over energy supply, higher UK oil and gas production would have meant more tax revenues for the Treasury and less reliance on fuel imports. It was also important because the oil and gas sector’s role as the country’s biggest industrial investor, largest corporate tax payer and most significant source of energy security was seemingly assured. Very importantly, at a time of high and rising unemployment, we anticipated that tens of thousands of new jobs would be created in an industry which was helping lead the UK out of recession.
Then on 23 March, the industry was hit with the shock Budget announcement that companies would now pay 62-81 per cent tax on their oil and gas production and that their ability to claim tax relief for decommissioning would be restricted. This was despite the Chancellor’s public assurance just nine months before in his first Budget speech that he recognised the importance of a ‘stable’ UK oil and gas tax regime which provided ‘certainty for investors’.
The Fallout
The industry’s trust in the Treasury, built up over several years of comprehensive engagement in joint pursuit of maximum economic recovery of the UK’s oil and gas, has been severely shaken. That applies not only to the oil and gas industry but has also caused consternation to those companies expected to invest the required £200 billion in our wider energy system.
The last period of fiscal instability led to investment falling by a quarter, an acceleration of the production decline rate, lower tax receipts and fewer jobs. Unfortunately, we can only expect a similar reaction this time, perhaps even more dramatic as the UK offshore oil and gas province is more mature and increasingly challenging from a technical viewpoint. The UK has to fight even harder to attract investment and having a reputation for fiscal instability does not help.
This, the third tax rate increase in nine years, under two different Administrations, has confirmed the UK’s reputation for fiscal instability. In contrast, neither the Netherlands nor Norway have changed their tax rates for two decades, making them much more stable places to invest.
Oil & Gas UK is now re-running its annual Activity Survey to quantify the collective impact of companies’ reappraisals of decisions on investment plans across the UKCS and plans to publish this by the end of the month.
Hurriedly constructed and ill-considered
A sudden change to the tax regime for a mature industry is worrying in many senses but the illconsidered nature of this one raises concerns for the whole spectrum of projects that were about to be kicked off in the UKCS.
For new fields, the tax increase completely removed the benefit of the new field allowance in promoting investment which would not have otherwise gone ahead in marginal opportunities. Older fields which will now pay 81 per cent tax are often those providing pipeline and processing hubs for satellite developments so not only will late-life investment be suppressed and decommissioning be accelerated, new prospects could be cut off from existing infrastructure, prohibiting their development.
The tax increase presents particular problems for gas fields because although they are liable for the higher tax rate from a trigger point of $75 per barrel oil, their product only fetches the equivalent of $55-60 per barrel. The move to tax gas as a higher rate will only damage the long-term outlook for UK gas production and encourage greater dependence on imported gas.
The long-term impacts of the tax hike will do nothing to aid the Government’s objective of business-led growth. The Government must find the means to rebuild confidence in the UK’s oil and gas regime as a destination for international energy investment and to wind back the worst impacts of this tax hike. It and the country simply cannot afford to leave this matter unresolved.
For more information, please contact Mike Tholen.
