During General Election fever, it was easy to forget that March saw the final Budget of the parliamentary term. But, it’s worth remembering that there were some big changes announced which continue to affect the UK - regardless of last week's outcome.
From an oil and gas perspective, there was much to discuss: the introduction of a UK Continental Shelf (UKCS) wide “investment allowance”; a reduction in the petroleum revenue tax (PRT) rate from 50% to 35%; cutting the supplementary charge on company profits to 20%; and a £20 million fund for seismic surveys.
All of this was welcomed, and rightfully so – these measures are big steps in the right direction. However, given the ongoing challenges faced by industry, there is still more to be done to make the UKCS an attractive and competitive place to explore, produce and invest. Tax will play an important part in this but there are also other factors at play.
Taxation – positive fiscal changes
Overall, the Budget has gone a long way to making the North Sea more competitive, particularly when compared internationally. The headline rates have been cut substantially and the regime has lost some of its complexity through the introduction of the investment allowance. These changes could help increase foreign investment in the basin, and there are a number of private equity houses also looking at UKCS assets.
However, there’s still work to be done. Per the Government’s own figures, these announcements will only cost £1.3 billion over the next five years which is a relatively small amount compared to the tax revenues generated by the industry. In addition, whilst the investment allowance does simplify the previous field allowance regime, there are still complexities that will need to be worked through, such as what will be included on the secondary list of qualifying expenditure and whether it will be possible to use the allowance across a group. Clarity and certainty over how this will take shape are important to reassure firms that might be considering parting with much-needed cash.
Exploration – seismic surveys
Seismic surveys are a positive step towards incentivising further exploration and appraisal (E&A) activity in the North Sea. The £20 million fund, which will be granted to the Oil and Gas Authority (OGA), has the potential to encourage more, much needed, E&A in the next few years.
That being said, £20 million in the context of the UKCS represents a drop in the ocean, if you’ll excuse the pun. The UK Government will hope that this investment will be self-funding over time, but it will need to be done on a much larger scale to stimulate material activity.
Decommissioning – deeds are good but more to be done
Little was said in the Budget about decommissioning. As we pointed out in our pre-Budget blog, it’s an issue of growing importance in the North Sea. Many firms have ageing assets which are reaching the end of their production lives and they are facing big bills when this infrastructure is finally taken out of commission.
In a time of low oil prices, it could be necessary for some to do this sooner rather than later – and if we lose key infrastructure hubs any surrounding smaller discoveries would most likely be economically unviable. To prolong the use of key infrastructure, fiscal measures need to be taken to support late-life asset transactions to put these in the right hands and extend the life of the basin. Providing the buyer with access to the previous infrastructure owner’s tax history could be one way of dealing with this.
Access to finance – distressed transactions?
Financing was an issue for the industry, even prior to the drop in the price of oil. While the price looks to be steadying now, access to finance remains a difficult issue. This could have significant consequences later this year as companies struggle to meet their financial obligations and are forced to sell off assets cheaply. However, for those in a strong financial position, this could be the ideal time to buy.
Despite positive moves from the UK Government, times are still tough on the UKCS and more needs to be done. Some of that will require more than government intervention – that’s where increased collaboration comes in. OGA of course has an important role to play in driving this too by encouraging, incentivising and, if necessary, enforcing new ways of working, to the benefit of the whole industry.
Whatever the case, further steps can still be taken to increase certainty, remove complexity and stimulate investment on the UKCS. Budget 2015 should just be the starting point.
You may also be interested in:
UK upstream independents in 2014: a year in the balance
Budget 2015: plotting a new course for the North Sea
A sea of change – three commitments needed for the North Sea in 2015
North West Europe End of Year Review 2014