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Tax reform now crucial in salvaging UK oil and gas production from end of decade

Oil & Gas UK today (8 March) set out its proposals for tax changes in the forthcoming Budget to boost the industry’s competitiveness and investors’ confidence in the UK continental shelf (UKCS). The calls for urgent tax reform follow the trade association’s recent publication of new forecasts which show that in the current price and business environment, more than one billion barrels of oil and gas are no longer considered economically viable to extract.

Mike Tholen, Oil & Gas UK’s economics director, commented: “In such a mature basin like the UKCS where special attention and expenditure must be directed at maintaining the integrity of oil and gas infrastructure, we know that strong and sustained investment does translate into higher production. The ten per cent increase in production in 2015, confirmed last week by the Oil and Gas Authority, is a direct result of significant annual capital expenditure in the five years to 2014.”

Mr Tholen continued: “With investment approvals likely to fall to less than £1 billion this year from a typical £8 billion annually over the last five years, there is a real risk that fields due to cease production in the next five years will simply not be replaced by new projects. Lost production puts at risk hundreds of thousands of skilled jobs, billions of pounds of tax revenues and the UK’s energy security. As a result, domestic oil and gas production is forecast to decline sharply beyond the end of this decade.”

The UK oil and gas sector is fighting hard for its survival and in a bid to restore competitiveness, expects to have improved efficiency and its average unit operating cost by more than 40 per cent compared with two years ago. This robust industry response needs to be accompanied by substantive tax reform to drive activity and send a powerful signal to global investors that the UK is open for business.

Mr Tholen said: “The industry currently pays 50 per cent tax on production profits – or 67.5 per cent for older fields – and we are calling for a permanent cut of 20 percentage points and the removal of Petroleum Revenue Tax. These rate changes, coupled with the existing first year capital allowances, are strongly aligned with HM Treasury’s ‘Driving Investment’ plan for fiscal reform. The incentivising effect on investment and production in the long-term should render it of minimal cost to Government.