Oil & Gas UK gives evidence on tax impact to Energy & Climate Change CommitteeNews // May 18, 2011
Representatives from the industry trade association Oil & Gas UK gave oral evidence to the Energy and Climate Change Committee in Westminster recently for its inquiry into the implications of the 2011 Budget on the UK’s offshore oil and gas industry.
The association’s co-chairs, Paul Warwick (President, UK and Africa, for ConocoPhillips) and Robin Davies (Global Vice-President, Business Improvement, at Subsea 7) were joined by Oil & Gas UK Chief Executive, Malcolm Webb, to voice their members’ grave concerns at the impact of the unexpected tax increase on investment and activity in the sector.
Commenting after the evidence session, Malcolm Webb said: “The UK’s offshore oil and gas industry remains of vital importance to this country now and in the coming decades for its contribution to the economy in terms of its hundreds of thousands of jobs, multi-billion pound investments and tax revenues besides energy security.
“Every £1 billion invested by our industry supports around 15,000 jobs. In a capital intensive industry such as ours, swings in investment could have a significant impact on employment.
“Our primary message today was that this increasingly mature sector needs careful handling. It cannot take shocks such as the recent tax hit introduced by the Chancellor last month. These reduce the UK’s relative attractiveness for investors who will now look to rival opportunities overseas where their capital will earn better returns.
“The Government said many times in the lead up to the Budget that it understood our industry’s need for fiscal stability. This need has not changed. Indeed, it is more important, given that we must rebuild the damaged trust between the industry and the Government.
"We have seen three major tax hits in nine years. Advance consultation on fiscal change seems to us best way forward, as is done currently in the Netherlands.
“We also said that the industry is ready to work with the Government on areas which have been jointly identified with the Treasury for further discussion.
"First, we need to discuss the fiscal treatment of gas, which represents 46 per cent of UK production, and has been particularly damaged by the tax move.
"Gas prices in the UK remain substantially below the suggested $75/bbl trigger price yet bear similar costs to oil for extraction. The tax increase will inevitably deter new investment in the UK’s gas resources which will increase our reliance on more expensive imported gas, to the detriment of the economy and the consumer.
“Second, we need to find means to re-incentivise investment in the UK’s oil and gas developments. The existing field allowances should be increased and new allowances introduced such as for oil and gas prospects west of Shetland and mature, pre-1993 fields that pay the additional Petroleum Revenue Tax (PRT) on top of corporation tax and the supplementary corporation tax.
"Doing so will reduce the risk that these fields will be decommissioned in the near future and their infrastructure removed, limiting the industry’s ability to recover small remaining reserves of oil and gas nearby.
“Third, the trigger price needs to be revisited, as we believe the concept is fundamentally flawed. The current proposal of a $75/bbl trigger price is inconsistent with the Government’s previous position.
"Last summer, when oil was $84, the Chancellor offered stability and suggested general satisfaction with the regime. Given $84 was acceptable then, and presumably there was some leeway in this price, it is inappropriate to now suggest a lower trigger price of $75 oil.
“Finally, we underlined our commitment to work with the Government to resolve the long term uncertainty surrounding decommissioning relief. We expressed our concerns about the Budget move to cap decommissioning relief at a rate lower than the tax charge.
"This new development raises significant concerns regarding Governments future intentions. Given Government has offered to engage on decommissioning, Oil & Gas believe it is appropriate to postpone implementation of the proposed restriction on decommissioning reliefs and bring all the issues together under the remit of the joint Treasury/undustry consultation for resolution by Budget 2012.”
The submission from Oil & Gas UK to the Energy and Climate Change Committee Inquiry can be found at: