Chancellor gives a boost to the UK oil and gas industry

The UK offshore oil and gas industry has one of the highest levels of operating costs in the global energy sector. The collapse in oil prices has hit the industry hard and seems set to cause a serious contraction in activity in the UK Continental Shelf (UKCS). However the offshore industry is a vital part of the British economy and an important strategic asset in terms of energy security. This comes at a time when the industry would in any event face the significant challenges associated with a mature basin with declining productivity and the need to address the costs of decommissioning abandoned assets.

In his 2016 Budget the Chancellor has announced a series of changes to the offshore oil and gas regime which it is hoped will act as a stimulus to the industry. The changes follow an extensive consultation between HMRC, the Treasury, Oil and Gas UK and industry focussed on the issues of encouraging exploration for new assets, supporting existing infrastructure and managing the decommissioning process.

The Chancellor has announced three key changes to the North Sea tax regime.

The first is the reduction of the rate of Petroleum Revenue Tax (PRT) to zero per cent. PRT was previously charged at a rate of 35 per cent in relation to oilfields which obtained development consent before 1993. PRT is charged in addition to corporation tax and supplementary charge, although it is deductible in arriving at profits for corporation tax and supplementary charge purposes. Many of the fields subject to PRT are now nearing the end of their lives and the costs of decommissioning can be offset against historic payments of PRT. Many fields are now in a pay-back position where HMRC are refunding historic payments against the costs of decommissioning. Reduction of the rate to zero will reduce the burden of PRT whilst preserving the ability to obtain relief for costs incurred at the end of a field’s life.

The Chancellor has also announced a reduction in the supplementary charge. The supplementary charge is paid on profits in addition to corporation tax. For the purpose of calculating supplementary charge adjustments are made to the corporation tax profit to add back finance charges. The supplementary charge was reduced from 30 per cent to 20 per cent in 2015 and will now be reduced again to 10 per cent. Both changes will take effect from the beginning of 2016.

In a further change the Chancellor has announced that field participators will be able to claim relief for decommissioning costs where they retain liability for those costs when they dispose of an interest in a field. Given the high rates of tax in the North Sea (67.5 per cent in relation to fields subject to PRT) and the generous provisions for carry back of losses, tax relief for decommissioning expenditure is a crucial issue in planning the life of a field. There has been much discussion around the possibility of specialist businesses developing a business model for managing late life fields and the associated decommissioning. It would be unlikely such a business would have the tax capacity to realise the full value of the relief for decommissioning expenditure and this has been seen as an impediment to those businesses. The change now proposed will remove any doubt around the use of relief by a selling participant and should encourage those who are looking to develop this business model by enabling a seller who retains decommissioning liability to access the value of historic capacity. Achieving efficiencies in the management of late life fields is seen as an important part of the strategy to maximise economic recovery in the North Sea.

A further change is to allow tariff receipts to trigger utilisation of investment allowance. Investment allowance is an offset available against supplementary charge. When introduced, it was only triggered by the winning of oil. Now it will be triggered where an owner of infrastructure, such as a pipeline, charges for the use of its assets. This is another move designed to support investment in assets in a mature basin such as the North Sea.

A commitment has also been made to work with Oil and Gas UK to seek a further effective reduction in the costs of decommissioning and the use of decommissioning relief to achieve that objective; this bodes well for the future.

Taken together these changes will be seen as a welcome sign that Government is listening to the concerns of an industry facing challenging times. Whether they will be sufficient to sustain the industry remains to be seen, but this is certainly a step in the right direction.