Autumn Statement: "further easing" of oil and gas tax burden needed to encourage production, expert says

Out-Law News | 04 Dec 2014 | 10:10 am | 1 min. read

New oil and gas industry tax breaks introduced as part of this year's Autumn Statement come at a "crunch time" for the future of the UK Continental Shelf (UKCS), but the industry will be hoping for more dramatic measures when an upcoming review of taxation is published, an expert has said.

Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, said that the measures announced by George Osborne were a "good start", but may not be enough to address the problems of diminishing production and increasingly difficult to access reserves without more widespread reform.

"The global oil and gas industry is in the midst of a transformation, grappling with weaker demand and continued regulatory and political instability which is contributing to price fluctuations," he said.

"The UKCS faces severe headwinds with a collapsing oil price. Today's announcement is indeed a step in the right direction for an industry under mountain pressure but the further easing of the very high oil and gas tax rates is top of the industry wish list and would be a high impact move by the Treasury. All eyes will be on Aberdeen tomorrow when further details are due to be announced," he said.

At the 2014 Budget, the government announced a review of oil and gas taxation as recommended by industry expert Sir Ian Wood in his report on how best to maximise recovery. Under current projections, the UK is expected to recover the equivalent of a further nine billion barrels of oil (boe) from the UKCS, but Wood has said that this could be increased to as much as 20bn boe if his recommendations are adopted in full.

The results of the government's review will be published shortly, but the measures will be designed to "incentivise extra investment and lead to additional production", according to the Autumn Statement document itself. They include a 2% reduction in the rate of the supplementary charge (SC) levied on taxable oil and gas profits above the usual corporate tax rate, from 32% to 30%. This will take effect on 1 January 2015. The government intends to reduce this rate further in future in "an affordable way ... sending a strong signal that the UKCS is 'open for business'", according to the document.

The Autumn Statement also commits to an extension of the ring fence expenditure supplement (RFES) to offshore oil and gas activities, as well as to those that take place onshore. The RFES allows companies that do not yet have sufficient taxable income to uprate their losses by 10% for a maximum of six accounting periods, which need not be consecutive. A new 'cluster area allowance', intended to maximise exploration and appraisal activities at hard-to-exploit sites, will also be introduced, according to the document.