The existing tax regime for the exploration and production of oil and gas in the United Kingdom and the UK Continental Shelf (UKCS) comprises three elements:
- a petroleum revenue tax at a rate of 50%, which is levied on profits from fields given development consent before March 16 1993;
- a ring-fence corporation tax at a rate of 30% levied on the post-petroleum revenue tax profit of companies engaged in oil and gas extraction activities; and
- a supplementary charge at a rate of 30% with effect from January 1 2015 – prior to the 2014 Autumn Statement this was levied at a rate of 32% – levied on the post-petroleum revenue tax profit of companies engaged in oil and gas extraction activities, resulting in a headline effective tax rate of 80% for petroleum tax revenue-paying fields or 60% for non-petroleum tax revenue-paying fields.
The combination of the existing tax regime and the recent decline in the oil price has raised widespread concerns within the industry and government that exploration and development operations in the United Kingdom will be curtailed and ageing fields will be decommissioned earlier than expected. In a move to stimulate exploration and development and extend the life of more mature fields, the Treasury announced a raft of tax relief measures for UK exploration and production in the 2015 budget:
- Petroleum revenue tax will be reduced from 50% to 35% and will have effect from January 1 2016. The aim of the reduction is to encourage investment in incremental projects in older fields and extend the life of key infrastructure needed to make small new discoveries commercially viable.
- Further to the 2% reduction announced in the 2014 Autumn Statement, the supplementary charge will be reduced from 30% to the pre-2011 rate of 20% with effect from January 1 2015. The Treasury has stated that this reduction is designed to "send a strong signal that the UKCS is 'open for business' and ensure it remains competitive as the basin matures".
- An investment allowance exempting a portion of profits equal to 62.5% of a company's qualifying investment expenditure from the supplementary charge will be available for projects in both new and existing fields. The allowance will apply to investment expenditure incurred on or after April 1 2015 and aims to encourage new investment in the UKCS and simplify the existing system of offshore field allowances.
- The government plans to provide £20 million of funding in 2015-2016 for a programme of seismic and other geoscientific surveys to increase exploration in under-explored areas of the UKCS. The funding will be allocated to the Department of Energy and Climate Change and the Oil and Gas Authority, which will commission a programme of seismic and other geoscientific surveys – expected to take place in Summer-Autumn 2015.
- In addition to the Department of Energy and Climate Change's power to scrutinise companies' plans for decommissioning programmes to ensure that they consider the environmental impact, the Oil and Gas Authority will have the power to ensure that such plans are also cost effective. The government is also going to work with the Oil and Gas Authority and industry to ensure that the supply chain is equipped to take up the opportunities offered by timely decommissioning.
- In the last Autumn Statement, the government announced the introduction of a new cluster area allowance to support the development of high-pressure, high-temperature projects and encourage exploration in the surrounding cluster. Following consultation, the relevant legislation has been revised to:
- introduce power to extend the definition of qualifying expenditure in the future by secondary legislation; and
- introduce a restriction for expenditure incurred on the acquisition of a licence interest.(1)
The above tax reliefs have the effect of reducing the headline effective tax rate to 67.5% for petroleum tax revenue-paying fields or 50% for non-petroleum tax revenue-paying fields and, coupled with the other measures announced, are designed to promote exploration and development operations and the extension of the life of more mature fields to the benefit of industry participants.
The budget has been positively received by the oil and gas industry, with Oil & Gas UK (the body that represents UK offshore operators) welcoming the announcement and stating that it "lays the foundations for the regeneration of the UK North Sea" and that the "measures send exactly the right signal to investors. They properly reflect the needs of this maturing oil and gas province and will allow the UK to compete internationally for investment". Further, Oil & Gas UK estimates that in the short-term the measures announced could incentivise an additional £4 billion of investment, enabling the development of 500 million barrels of oil, which at today's prices are worth £20 billion. Ernst and Young commented that the measures announced are "welcome news for the UK oil and gas industry" and that "the Government has taken a big step towards creating a fiscal regime that is appropriate for the long term exploitation of the UK's natural resources".
For further information on this topic please contact Alastair Young or Darren Spalding at Bracewell & Giuliani (UK) LLP by telephone (+44 20 7448 4200?) or email (firstname.lastname@example.org or email@example.com). The Bracewell & Giuliani (UK) LLP website can be accessed at www.bgllp.com.
(1) The measures announced in the budget are available from the Treasury at www.gov.uk/government/publications/budget-2015-documents.
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