Budget 2017: Chancellor announces North Sea help

 

Budget 2017: Chancellor announces North Sea help

budget North Sea

Media captionThe budget is Mr Hammond’s first as chancellor

The chancellor has used his budget to outline plans to help the North Sea oil and gas industry.

Philip Hammond will investigate the use of tax incentives to make it easier for operators to sell oil and gas fields, helping to keep them productive for longer.

A panel of experts will be set up to examine the issue.

A discussion paper on how to help the industry will also be published, Mr Hammond told the Commons.

The Treasury said the moves would further help a vital industry that meets around 50% of the UK’s primary energy needs.

It said the measures would build on “unprecedented support already provided to the oil and gas sector through £2.3bn packages in the last three years”.

Mr Hammond announced the new help for the North Sea as he outlined a budget that he said was aimed at “building the foundations for a stronger, fairer, more global Britain.”

The budget included a £350m funding boost for Scotland as part of a package of funding for the devolved nations.

In terms of the North Sea, Oil and Gas UK had called for more to be done to “facilitate the transfer of assets” to stimulate additional investment.

In its Business Outlook report published on Tuesday, the industry body said it was “continuing to ask the Treasury to revise the tax treatment of decommissioning liability in support of this”.

The report warned of a major drop-off in production without additional capital investment, but said there were some signs of optimism with confidence “slowly returning to the basin” despite the global slump in oil prices.

Derek Mackay, the Scottish government’s finance secretary, had also written to the chancellor calling for “action to improve decommissioning tax relief, ensuring that the right assets are in the right hands”.


Analysis by Kevin Keane, BBC Scotland energy correspondent

oil platform in north seaImage copyrightGETTY IMAGES
Image captionThe UK’s oil and gas industry has been struggling with a dramatic drop in oil prices over the past two years

So what are these “tax breaks?” Well, the commitment to decommissioning was always a joint liability between the operators and the government, both of whom have benefitted from the bonanza.

The operator would stump up the cash and the treasury would pay back some of the tax paid over the years.

But it was always assumed oil fields would stay in the hands of big players like BP and Shell until the bitter end.

A lot of fields aren’t now making enough money for those oil majors and they want rid. But there are new kids on the block with the skills and commitment to produce the last few drops of black gold who would consider buying fields and keeping them going.

But there’s a blockage. When it comes to decommissioning the responsibility shifts to them. Because they’ve not been around for long, they’ve paid a lot less tax than the big boys.

And because they can only claim from the Treasury what they’ve already stumped up, much more of the liability shifts from the government to this small operator. What the panel will work out is how the full value of tax refunds, which would have been paid to the old operator, can shift to the new one.

That move should prompt more of these older fields to be sold and not decommissioned early. It shouldn’t cost us, the taxpayer, any more and potentially because it keeps the oil fields producing, it should even benefit the treasury.


Responding to Mr Hammond’s announcement, Mr Mackay said it was “encouraging that the UK government has finally listened to the Scottish government about the failings of the decommissioning tax regime”.

He added: “This is an area where we have repeatedly called for reform and which the UK government have been slow to react, therefore it is important that this group comes to a swift conclusion and is not simply another talking shop.”

Scotland Office minister Andrew Dunlop said the announcement was “positive news for Scotland’s oil and gas industry”.

He added: “There are very significant reserves still in the North Sea, and it is vital that the UK government does all it can to help the industry maximise these.

“We need to ensure that our tax regime helps support the industry in the most appropriate way.”

Scottish Chambers of Commerce chief executive Liz Cameron said the move was a “welcome first step” towards ensuring that the North Sea “sustains its economic contribution in the long term and maximises recovery in the nearer term”.

She added: “Our hope is that not only will the expert report be available by the time of the Autumn Budget but that concrete measures will be announced at that time too.”

The Unite union’s Scottish secretary, Pat Rafferty, said: “The chancellor’s expert panel is a small step in the right direction, but it’s vital that workers have a seat around the table.

“If the oil and gas sector is to have a secure future, we need genuine partnership between unions, government and industry.”


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UK Budget opens review of North Sea tax rules Expert panel to examine ways of making it easier to buy and sell energy fields Read next Hammond’s Budget targets self-employed for tax rises

A review of North Sea tax rules has been opened to find ways of spurring fresh investment in UK oil and gas assets and spreading the multibillion-pound cost of decommissioning between industry and government.

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Philip Hammond, UK chancellor, said in his Budget speech on Wednesday that an expert panel would examine ways of making it easier to buy and sell North Sea oil and gasfields, with the aim of keeping them in production for longer. The announcement reflects the Treasury’s focus on how to wring as much as possible out of the remaining North Sea resources as decommissioning costs become an increasing burden for industry and taxpayers. “As UK oil and gas production declines, it is absolutely essential we maximise exploitation of remaining reserves,” Mr Hammond told MPs. Oil and gas companies are entitled to tax relief on the cost of plugging wells and dismantling infrastructure when fields cease production. However, the value of these benefits depends on how much tax the operator has paid during the life of the asset.

FT verdict on the UK Budget Play video Industry leaders say these rules deter the trading of oil and gasfields because an acquiring company cannot claim relief on taxes paid by the previous owner. The review announced in Mr Hammond’s Budget will look at options for reform, including demands for the full value of tax relief to be transferable from one owner to another. Read more Budget 2017: summary and key points Highlights include economic growth upgraded in the near-term and business rate measures Removing the blockage to dealmaking has become an increasingly pressing issue as many older North Sea fields approach the end of their productive lives while producers struggle with high costs and relatively low oil prices.

The Treasury and the energy industry are both counting on new investors — especially smaller companies and private equity funds — to help squeeze out the last oil and gas just as many large companies seek to sell older fields. “The right assets need to be in the right hands to maximise economic recovery,” said Derek Leith, an oil and gas specialist at EY, the consultancy. Shares in Premier Oil, the North Sea oil producer, rose 2.5 per cent on the chancellor’s speech. There are an estimated 10bn-20bn barrels of recoverable oil and oil equivalent remaining beneath the North Sea, compared with 43bn barrels extracted since production started in 1967. However, unlocking those resources will depend on the North Sea staying competitive against lower-cost regions elsewhere. Should new investment fail to materialise, the North Sea basin could fall into a spiral of declining production and costly decommissioning, which would make it a net drain on Treasury coffers. Tax revenues from the North Sea have declined rapidly in recent years. In the 2015-16 fiscal year, the government incurred a loss from North Sea producers as tax relief exceeded revenues and producers’ profits were hit by weak oil prices. This year, oil and gas revenues are expected to be just £100m. Forecasts for oil and gas revenues between 2017/18 and 2021/22 were revised down in Wednesday’s Budget by £2.7bn compared with the Autumn Statement. Revenues during that five-year period are expected to total £4.6bn North Sea decommissioning costs are forecast to exceed £50bn during the next four decades, with almost half the liability to be met by the Treasury through tax relief, according to Wood Mackenzie, the energy research company. Read more Budget 2017: reaction and analysis The FT’s columnists and commentators respond to Philip Hammond’s statement Claire Angell, KPMG’s oil and gas tax partner, said that while the Treasury was signalling a willingness to consider the transfer of existing tax relief, the government would be determined to avoid taking on a bigger share of the decommissioning bill. “The government is saying, ‘we understand the problem’, but they have also made clear that any solution will have to be achieved without increasing the cost

Tax revenues from the North Sea have declined rapidly in recent years. In the 2015-16 fiscal year, the government incurred a loss from North Sea producers as tax relief exceeded revenues and producers’ profits were hit by weak oil prices. This year, oil and gas revenues are expected to be just £100m. Forecasts for oil and gas revenues between 2017/18 and 2021/22 were revised down in Wednesday’s Budget by £2.7bn compared with the Autumn Statement. Revenues during that five-year period are expected to total £4.6bn North Sea decommissioning costs are forecast to exceed £50bn during the next four decades, with almost half the liability to be met by the Treasury through tax relief, according to Wood Mackenzie, the energy research company. Read more Budget 2017: reaction and analysis The FT’s columnists and commentators respond to Philip Hammond’s statement Claire Angell, KPMG’s oil and gas tax partner, said that while the Treasury was signalling a willingness to consider the transfer of existing tax relief, the government would be determined to avoid taking on a bigger share of the decommissioning bill. “The government is saying, ‘we understand the problem’, but they have also made clear that any solution will have to be achieved without increasing the cost

Revenues during that five-year period are expected to total £4.6bn North Sea


 

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Budget 2017: North Sea oil and gas tax relief will be reviewed by a panel of experts

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Cabinets From Both UK And Scottish Governments Meet In North East Scotland

Now is a crucial time for the North Sea to attract investors (Source: Getty)

As the UK faces declining oil and gas production in the North Sea, the chancellor has unveiled new measures to review tax relief and maximise the exploitation of remaining reserves.

In his Budget, chancellor Philip Hammond said a new advisory panel of industry experts will be established and a formal discussion paper will be published on how tax can assist sales of North Sea oil and gas fields.

“While not a complete overhaul, it is hoped these measures will alleviate the current bottleneck around the transfer of mature fields in the North Sea to late life specialists,” said Chris Bates, a partner of global law firm Norton Rose Fulbright.

Read more: Shell has revealed its plans to remove its Brent North Sea platforms

However, Stewart Hosie, MP for the Scottish National Party, said the announcement shows a failure to act and demonstrates “an alarming lack of urgency”.

Recent deals in the North Sea highlight the opportunities there, but more transactions could be achieved if the tax issue is resolved, said Deirdre Michie, chief executive of Oil and Gas UK.

The industry is slowly emerging from a challenging period, and it’s crucial that the North Sea attracts investment now to sustain production and stimulate new activity, she said.

Alan McCrae, PwC’s UK head of energy tax agreed, saying: “If we are to maximise the lifespan of the basin, it’s vital that these barriers are unblocked, enabling assets to move to companies that are likely to invest in the medium to longer term – before they find alternative uses for their capital elsewhere.”

Read more: North Sea oil projects are rife with delays and overspending

 

 

 

decommissioning costs are forecast to exceed £50bn during the next four decades, with almost half the liability to be met by the Treasury through tax relief, according to Wood Mackenzie, the energy research company. Read more Budget 2017: reaction and analysis The FT’s columnists and commentators respond to Philip Hammond’s statement Claire Angell, KPMG’s oil and gas tax partner, said that while the Treasury was signalling a willingness to consider the transfer of existing tax relief, the government would be determined to avoid taking on a bigger share of the decommissioning bill. “The government is saying, ‘we understand the problem’, but they have also made clear that any solution will have to be achieved without increasing the cost for the Exchequer,” said Ms Angell. Callum McCaig,

Callum McCaig, energy spokesman for the Scottish National party, attacked the UK government for moving at a “glacial pace” on an issue highlighted by industry for years. “The fact the chancellor is just getting around to this now shows an alarming lack of urgency,” Mr McCaig said. Some deals have taken place despite the tax obstacles. Royal Dutch Shell in January sold for $3.8bn assets accounting for more than half its UK production to a private equity-backed company called Chrysaor. Shell agreed to keep a quarter of the estimated $3.9bn decommissioning liability related to the fields being sold. Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

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