Thursday, 24 March 2016

Latest UK Oil Tax Cuts Constrained by Challenging Project Economics, says GlobalData Analyst - 24/03/2016

Latest UK Oil Tax Cuts Constrained by Challenging Project Economics, says GlobalData Analyst

While the larger-than-anticipated cuts to the headline tax rate on the UK’s oil and gas sector, announced in the recent budget on 16 March 2016, reduced the level of state take on all UK projects, they were biased toward older, existing assets, according to an analyst with research and consulting firm GlobalData.

The headline tax, to which changes will apply retroactively from 1 January 2016, will be cut from 50% (or 67.5% for older fields) to 40%, and could see values of some new developments and mature fields increase by up to 20% and 70%, respectively.

Erik Lambert, GlobalData’s Upstream Fiscal Analyst, says the impact of these tax cuts will vary significantly across company portfolios, particularly considering that many fields are already untaxable due to the low oil price.

Lambert explains: “The Petroleum Revenue Tax (PRT), applicable only to projects given development consent before March 1993, was permanently reduced to 0%, providing tax relief to older developments. However, all fields will benefit from the reduction in the Supplementary Charge from 20% to 10%.”

Other fiscal incentives announced in the budget include measures which attempt to contribute to the government’s Maximizing Economic Recovery (MER) strategy for offshore oil and gas reserves. For example, the government intends to include tariff income in the definition of ‘relevant income’, which activates the Investment and Cluster Area Allowances for the Supplementary Charge, to support infrastructure development. The UK government also made clear that firms retaining the decommissioning liabilities for assets would receive tax relief on these costs.

Overall tax revenues from the North Sea turned negative in the first half of the 2015/2016 financial year, and the Office for Budget Responsibility is forecasting negative revenues for the next five years. While the headline tax cuts have further improved the UK’s globally competitive fiscal regime, they do little to address relatively high development costs in a mature basin, according to GlobalData.

Lambert concludes: “Further cost cuts will be required to improve project economics and producer profits on the UK Continental Shelf (UKCS), and in turn generate government tax revenue.”

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