Tax reduction might be of little help to the E&P industry in low oil price environmentNews // April 4, 2016
Amid prevailing low oil prices, the UK government recently announced tax cuts for energy companies, in order to support the oil and gas industry in a difficult macro environment. The proposed tax manoeuvre essentially reduces the Supplementary Charge paid on company profits from 20 per cent down to 10 per cent, and abolishes the Petroleum Revenue Tax still paid on some producing fields; both these measures are effective from January 01, 2016. Only last year the UK government reduced the Supplementary Charge from 32 per cent to 20 per cent.
However, Rystad Energy’s analysis shows that while the Supplementary Charge cut would benefit companies under a high oil price environment, the effect could in fact be the opposite under a low oil price scenario.
Essentially, only companies with the most competitive portfolios would benefit from the tax cut, while operators with more mature portfolios could be hurt by the current tax reduction and could see the value of their UK assets diminish.
"With the current oil price hovering around US$40 per barrel, most of the companies operating on the UKCS are not in a tax position this year," said Rystad Energy. The top five companies with headquarters in the UK already show a negative net income this year, and further reduction in taxes will not help improve their free cashflow."