UK cuts tax on North Sea drilling amid tumbling oil prices

12/3/2014

UK cuts tax on North Sea drilling amid tumbling oil prices

NIDAA BAKSH

LONDON (Bloomberg) -- The UK announced tax cuts on North Sea oil output that fell short of demands by industry to ease pressure on drillers amid the collapse in crude prices.

The supplementary tax will be cut to 30% from 32%, taking effect from Jan. 1, Chancellor of the Exchequer George Osborne said today in his Autumn Statement to parliament. The government will also introduce an allowance to support high- pressure-high-temperature projects, he said.

Explorers had sought a reduction of the supplementary rate to 20 percent, the level before increases introduced in 2011. Today’s decision will give the industry an annual break of 90 million pounds ($141 million) for the next five years, a fraction of the industry’s overall tax bill, expected to be 2.8 billion pounds in the year to March 2015, according to Deloitte LLP.

The measures are “expected to incentivize extra investment and lead to additional production,” according to a document published by the Treasury following Osborne’s speech. Further details will be announced in Scotland’s oil town of Aberdeen tomorrow.

“We will certainly need further reductions in the overall rate of tax to ensure the long-term future of the industry,” said Malcolm Webb, head of Oil & Gas UK, which represents about 500 companies. The cuts, the first in the North Sea in 21 years, are the “first steps towards improving the overall fiscal competitiveness” of the U.K. continental shelf.

Plunging Crude

Oil prices have dropped by more than a third this year, while the cost of pumping crude rose 26% last year alone, according to Oil & Gas UK. Output fell 40% in the last three years, according to the lobby.

Based on today’s news, the industry will pay tax of 60 to 80%, the lobby said. The supplementary charge is on top of corporation tax, which stands at 30% for oil extraction.

The reduction is a welcome step, Derek Leith, managing partner at Ernst & Young LLP in Aberdeen, said in an e-mailed note. “But, following three successive increases in taxation, it falls short of the bold reforms we called for prior to the Autumn Statement and can be considered to be of greater political significance than economic benefit.”

The U.K. is also stimulating development of shale gas for energy security and job creation, it said, allocating 36 million pounds to educate the public about the “robustness” of the regulatory regime as well as creating research facilities. It will also set up a wealth fund that will use tax revenues from shale exploitation to benefit northern England.

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