Tax reform welcome but industry needs to tackle high costsNews // April 1, 2015
With North Sea producers reeling with the impact of the oil price collapse and jobs and spend being slashed, on March 18th the UK Chancellor of the Exchequer announced tax cuts.
"Many are wondering what this means for the oil and gas industry as tax was only one of the major problems, the other is industry costs," said John Westwood, founder of Douglas-Westwood.
"The petroleum revenue tax, currently 50 per cent, and levied on profits from field developments prior to March 1993, is to be cut to 35 per cent, from 1st January 2016. A supplementary corporation tax is also to be reduced from 30 per cent to 20 per cent with immediate effect and be backdated to 1st January of this year. The UK government is also planning to invest circa £20m of public spending on seismic survey projects in under-explored UKCS basins.
"The tax reform was welcomed by North Sea Operators such as EnQuest, who plans to invest circa US$600 million in Capex this year and believes the tax relief will benefit investment in existing assets in mature fields. All things equal, the tax cuts and investment in new seismic activities are unlikely to have an immediate major affect as the oil price still needs to be high enough to justify the discovery and development of new oil and gas fields.
"So whilst the tax cuts are largely welcomed, the oil and gas industry is still facing the challenge of high costs. Before the collapse, between 2000 and 2013 oil prices rocketed by 281 per cent which supported a massive 287 per cent growth in global industry expenditure.
"However, despite all the spend, global oil and gas production increased by only 24 per cent. The present period of low oil prices should give an opportunity to address the problem of high costs and inefficiency," Mr Westwood concluded.