Gordon Brown final budget has been touted as being good for business by some commentators, however, for those in the upstream oil and gas industry, this couldn’t be further from the truth. Indeed of the tax breaks offered few apply to upstream oil & gas companies. For example, it is particularly disappointing that the oil industry is not to benefit from the reduction in corporation tax rates generally. Indeed, some have said, that despite the high taxes discouraging investors in the UK oil industry, the Treasury has "turned a blind eye" to the industry's needs.
Comments from the industry have been equally as critical. Malcolm Webb, UKOOA's chief executive, said: "The Treasury clearly recognises that lower taxes are good for business, but unfortunately fails to apply that principle to our industry. The Chancellor was quick to raise the tax take from this industry when he saw oil and gas prices rising towards $60 dollars a barrel. But now that the price of gas (which makes up almost half of total UK production) has fallen to the equivalent of $20 per barrel, he sits on his hands."
Despite this it is unfair to say that the industry is being completely ignored by the Treasury. Over the last year and a half there have been extensive discussions between the Industry and Government. The Treasury published these discussions in a paper on the 22nd of March. Whether this ongoing consultation will have any positive effect for the industry or whether it is merely the governments way of appearing to work with the industry, whilst in reality offering very little, remains to be seen.
The first area in which there is ongoing dialogue is Petroleum Revenue Tax (PRT). PRT applies only to fields given development consent before March 16, 1993. Draft clauses on the exemption from PRT of redeveloped fields (that received consent before 1993) have been mooted. This change is being made as a result of representations made during the prior consultation period. In essence the clauses provide that if the original field has clearly been abandoned any redevelopment of the same geological structure will not be within the PRT net.
It has emerged however that the Treasury believes that the removal of petroleum revenue tax (PRT) from older North Sea fields could be difficult. The discussion paper initial analysis suggested that the removal of the PRT system could have benefits for the UK continental shelf (UKCS) and furthermore the Treasury said the Government continued to examine possible policy options that would facilitate the removal of PRT.
But it added that there were several factors that could make such options difficult to implement such as accurate estimating of decommissioning costs and remaining reserve levels. The Treasury added that it is possible that the overall outcome of the current work on PRT may be the retention of the current system. Whilst PRT will not to be abolished in the near future, the issue could still be addressed at some point further down the road.
There was a small dose of positive news with the announcement that it is possible to claim an unrelievable field loss. The Government is introducing this because of a concern that fields where permanent cessation of production appeared to have taken place could, relatively easily, be started up again if and when the oil price environment or technology changed.
On the question of separate regimes for oil and gas production, availability of Research & Development credits, and relief for decommissioning provisions, the Government have indicated they see no need for any change just now, but are prepared to listen to further arguments.
Overall in the paper, there is a general acceptance that additional exploration in the UKCS needs to be encouraged. This indeed is a step in the right direction. Despite this, the Government is yet to be persuaded that tax incentives will have any material impact on the current levels of exploration, which is an unfortunate position and counter to the industry argument that the high tax regime is driving investment in exploration away. Nevertheless, the Treasury is open for further comment on whether and how incentives in specific areas might be effective.
Budget 2007 was clearly a disappointment for the industry - this cannot be denied, especially amongst the uncertainly that still hangs over the North Sea fiscal regime. At the same time however, there is still some small hope that the Treasury will continue to listen to the industry's concerns about the fiscal regime and hopefully then actually address the high tax rates that discourages investment.