UK: law firm responds to budget statementNews // March 20, 2015
Further to the UK government’s budget announcement on the North Sea earlier this week, below are comments from Norman Wisely, partner at CMS, Europe’s largest law firm.
“Subject to seeing the detail on the allowance designed to stimulate investment, the reduction in the Supplementary Charge (SCT) and Petroleum Revenue Tax (PRT) for investors in the North Sea is a welcome boost to the UK oil industry going much further than the ineffective recent 2 per cent reduction in SCT, in an attempt to arrest the recent alarming industry decline.
"As a 'watershed budget' (in the word of Sir Ian Wood) in respect of oil and gas, only time will tell whether the tax cuts and allowances go far enough.
"Whereas the SCT reduction in particular to align with previous levels will be seen as beneficial to the wider industry, comparatively few (older – pre-1993) North Sea oil fields still remain liable to PRT and so the impact is likely to be less in that regard.
“In spite of the good news today about tax incentives for North Sea oil and gas investments, the dramatic reduction in the oil price has led to an irreversible mothballing of some projects and major cost cutting.
"This was always going to happen as the cost base for the operators had grown out of shape. Nearly every service company is being asked by their customers to discount pricing and I don’t expect this to change.
“The budget is unlikely to put the brakes on the rise in distress M&A activities in the North Sea as companies struggle to remain viable.
“The decline in the oil price has already led to a significant increase in North Sea disputes and this is unlikely to be affected by the budget. Current disputes include situations where companies have run out of cash to pay their bills or approve capital or operating expenditure necessary to allow field operations to continue, and oil companies trying to terminate long term contracts with service companies, many of which were agreed when the drilling day-rate was as much as double of what it is now.”