Precise takes a closer look at George Osborne's Autumn Statement and the subsequent effects this will have on the oil and gas industry.
The Chancellor’s nod to the UK’s oil and gas industry has been given a muted welcome. Dropping 2% from the North Sea taxes just three years after suddenly hiking them by 12% has been seen as a start but George Osbourne knows the industry wants the Government to go a lot further.
The Government’s aware that this industry is vital to the UK economy – employing about 450,000 people and paying around 5 billion pounds in upstream taxes. And it knows that the industry is facing a very difficult period with high extraction costs combined with low oil prices. Indeed, a recent survey by Aberdeen and Grampian Chamber of Commerce suggested confidence in the sector was at its lowest for six years.
Indeed those troubled times were made evident just this weekend with oil giant BP announcing it has accelerated it’s downsizing plans. While losing hundreds of back office jobs had long been in the offing due to the continuing financial burden as a result of the oil spill in the Gulf of Mexico in 2010, BP said it’s speeding up the process due to falling oil prices. The company will outline details of the planned job cuts on Wednesday.
So it was with disappointment that the industry received the news about the tax cuts. Cutting the supplementary charge – by a figure much less than the industry had hoped for – came as the Office for Budget Responsibility downgraded North Sea oil revenues by £4.5 billion.
Underwhelmed by the announcement, consultancy firm EY said, “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.”
Industry body Oil and Gas UK said it was the first cut in tax rates for the UK North Sea for 21 years. However the Chief Executive Malcolm Webb said, “These can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea.”
Extending the system of deferred tax relief is aimed at improving the prospects of the shale oil and gas drillers – a move which Webb says is crucial to improving the investment outlook. “Given the current crisis in exploration, we also need to see measures to promote exploration activity across the basin.”
The Government also has plans to establish an investment fund from money collected from shale gas production. That fund will then be invested in places where shale gas developments might take place in the future. Britain is hopeful that shale gas will give a much needed boost to the ageing North Sea operations. But it faces an uphill battle with many local communities vorciferous in their opposition. The Government’s trying to counter that by allocating a £5 million pot to better communicating the benefits of fracking to communities.
From a global perspective there is hope that this statement will create real change. Alan McCrae, head of energy tax at PwC, welcomed it, saying the Chancellor now appeared to be fully aware of the many challenges the industry faces. He hopes it will prove to outside investment that the UK is prepared to up its game. “The(y) will be welcomed by many in the industry and will be seen by some investors as an important signal that the UK is prepared to listen to their concerns.” But whatever hope business leaders have for the future, it will be little comfort for those BP workers who will find out if they’re to lose their job on Wednesday.