In the March 2015 Budget, chancellor George Osborne reacted to a significant fall in crude oil prices and to industry calls by reversing a tax hike that he imposed in 2011. This move could provide a lifeline to aging fields and help protect the industry from the ”pressing danger“ posed by low oil prices, the Chancellor announced.
Effective tax rates on production from older oil and gas fields will be reduced from 80 per cent to 75 per cent immediately and backdated to January, while on newer fields it will be cut from 60 per cent to 50 per cent, Oil & Gas UK, the industry body said. Further tax cuts which come into effect next year will reduce the overall tax rate on older fields to 67.5 per cent. The Chancellor said the new measures would be worth £1.3bn over five years and would boost North Sea oil production by 15 per cent by the end of the decade.
The Chancellor’s plans come amid governmental concerns that, without action to reduce tax, investment could dry up and that older fields, nearing maturity and approaching the end of their lives, could be shut earlier than expected or abandoned. Inaction could result in thousands of workers losing their jobs..
Output on the UK continental shelf has been gradually sliding since 2000. Oil & Gas UK says that it fell another 1 per cent last year to 1.42m barrels of oil equivalent a day (boe/d) against a peak of 4.5m boe/d 15 years ago.
Before the halving of the Brent crude price, from $115 a barrel last summer to $56 a barrel now (partly due to a growth in U.S. shale oil production which has flooded the market), a wave of North Sea mergers and acquisitions had been anticipated. Many analysts predicted operators would leave a region where production is in long-term decline. For the larger energy companies it was more commercially viable to make larger capital investments elsewhere involving larger discoveries than continuing to invest in smaller fields or those nearing the end of their lives.
Smaller sized competitors that specialize in extracting value from depleted assets had been expected to take a larger share of output, but this never came to fruition, with lower oil prices simultaneously speeding up divestiture plans and also freezing the M&A market.
Sir Ian Wood, the Aberdeen-based oil billionaire who led a government-commissioned review on the North Sea, said the budget measures provided “the essential lifeline” to boost confidence and attract investment.