Aberdeen 'city deal' will fall flat without oil and gas tax cuts, says expert

Out-Law Analysis | 04 Feb 2016 | 8:30 am | 2 min. read

OPINION: The recently-announced £500 million investment package for Aberdeen will make little difference to the prospects of the North Sea oil and gas industry without cuts to the hefty taxes paid by exploration and production companies.

The UK Continental Shelf (UKCS) has for decades had one of the highest levels of taxes of all oil-producing countries, and suffers a double whammy by being a mature basin. Simply put, the 65% headline tax on the profits of these companies must be reduced to be more competitive with other oil-producing regions - and, on a domestic level, to be more consistent with other major industries.

In the March 2015 Budget, the UK government announced a cut in Petroleum Revenue Tax (PRT) from 50% to 35%; effectively reduced the supplementary charge to 20%; and set aside £20m to support more seismic surveys of under-explored North Sea fields. Leaving aside the fact that most in the industry thought this package was woefully inadequate when crude was $60 a barrel, now we are in $30 a barrel territory many fear that unless further concessions are made we risk a flight of capital, skills and technologies which will not return.

It is well-known that the UK is among the highest operating cost environments in the world in the oil and gas space, and so by necessity oilfield services companies have had to look to other countries to improve their margins. Against this background, the £250m City Deal for Aberdeen announced by the UK government and separate £254m Scottish Government investment package will fall flat unless Westminster follows through on these promises with concrete action in the form of further tax cuts.

Indeed, these views chimed with a major survey published this week by Pinsent Masons, the law firm behind Out-Law.com, which sought the views of 200 senior oilfield services and private equity firm executives. Although the overall tone of the report was general upbeat – an overwhelming 96% of respondents believed that the UKCS would recover to 'peak' levels of profitability – it also contained caution and concern.

Respondents who were hesitant about a revival in the North Sea mostly attributed this to the waning dependence on oil in general, and businesses moving from the mature basins to more competitive and profitable frontier markets in Latin America or Southeast Asia. One partner in a UK-based private equity firm said bluntly that it was "difficult to continue carrying on business profitably in this region", adding that many companies are moving to more profitable regions - particularly those with a favourable tax regime, a stable regulatory framework, good infrastructure and skilled labour.

The report also highlighted that in 2016 there will be a surge in mergers and acquisitions driven by a mix of companies looking to internationalise operations, a desire to acquire game-changing technologies and those seeing opportunities from turning around distressed assets

It is widely accepted that UK companies have world-leading expertise in the oilfield services sector, in particular operating in mature basins, where trying to keep the costs low and optimise production and efficiency is absolutely fundamental. This experience will also strengthen their hand in expanding their activities into new territories, a lot of which will be done through acquisitions.

Looking ahead, this next year will be a time of transformation and challenge that will bring forward the pioneering spirit that exemplifies much of the UK oil and gas industries. There will be winners and losers from the current cycle and, although there can be no guarantees of success, the chances will be greater if Westminster follows through on the promises made last week by David Cameron.

Rosalie Chadwick is an energy law expert at Pinsent Masons, the law firm behind Out-Law.com.

Editor's note 12/02/2016: this story was changed to remove a factual innacuracy about historic races of PRT. We apologise for the error