Call for tax regime to maximise recovery
More than half of the value of North Sea oil and gas reserves is yet to be extracted – representing an asset with a potential wholesale value of a trillion pounds – Alex Salmond said today, as he urged the UK Chancellor to deliver long-term stability in the tax regime to support maximum recovery by the industry.
The First Minister, in an address to an SCDI Oil & Gas conference, welcomed the fact the UK Government is now working with the industry on options for reform of the tax regime, following the Chancellor’s unexpected and damaging announcement in last year’s Budget of a hike in the supplementary charge paid by North Sea operators.
Ahead of the Chancellor’s Budget next month, the First Minister called for action to:
- Ensure the tax system maximises recovery rates, including the use of enhanced field allowances
- Ensure the industry is consulted on future tax reforms
- Provide greater certainty on future decommissioning tax relief
Mr Salmond also said a new strategy, developed with the oil and gas sector, would be published in the Spring – and outline how the Scottish Government and its agencies will continue to support the industry in priority areas such as maximising extraction rates, securing its future skills base and developing the supply chain in Scotland and further afield.
The First Minister said:
"The industry is a huge success story, and the key message from this year’s conference is that there is still much more to come.
"The public sector in Scotland will continue to support innovative companies to make their products a success, but for innovation to flourish, we also need a stable investment environment. The Chancellor’s decision last March to increase the supplementary charge paid by North Sea operators on their profits has been damaging to the prospects in more challenging and mature fields. The lack of consultation about the increase also undermined business confidence. With more than half of the value of North Sea oil and gas reserves yet to be extracted – representing an asset with a wholesale value of a trillion pounds – it is vital that the industry sees long-term stability in the tax regime.
"I suggested last year a number of options to the Chancellor to mitigate the damage caused by the supplementary charge increase and also urged him to ensure that any future changes to the tax regime for the oil and gas sector be made after consultation with the industry. As around 470 installations are due to be decommissioned over the next 20 years, at a cost of between £24 and £30 billion, the Treasury must also provide the industry with assurances that decommissioning relief will not be restricted or withdrawn in the future.
"I welcome the fact the UK Government is now working with the industry on options for reform. It is in everyone’s interests for the oil taxation system to be incentivising, stable and fair and I urge the Chancellor to ensure that next month’s Budget delivers long-term stability, certainty and confidence across the industry."
Oil and Gas production now contributes £32 billion to the UK’s balance of payments, with the supply chain adding a further £5-6 billion – more than halving the UK’s trade deficit. The industry supports almost 200,000 jobs in Scotland and has generated almost £300 billion, at today’s prices, in taxation revenues.
In his address, the First Minister also outlined the importance of establishing an energy fund, to invest some of the revenues from North Sea oil for the benefit of future generations.
And he pledged that Scottish Government support for industry priorities including maximising extraction rates, strengthening the skills base and developing the supply chain in Scotland and further afield would be 'at the heart' of the forthcoming strategy.
The First Minister told the industry audience in Edinburgh:
"The story of North Sea oil is a reminder of the engineering skill, technical ingenuity and human courage that people can bring to bear in confronting such challenges. As we embark on the next chapter of that story, more expertise will be needed to make the most of our extensive remaining reserves.
"In the spring, we will launch a new strategy to support the oil and gas sector, which we have developed in consultation with the sector for many months, including through our Industry Advisory Group, to advise on future priorities and actions. We want this strategy to be industry-led and supported. Collaboration will also be an essential part of the strategy.
"By working together – and within a stable, supportive tax regime that maximises recovery – the prize of Scotland using its vast range of natural resources to be the energy powerhouse of Europe, is firmly in our grasp. And we can ensure that the next four decades of oil and gas production in Scotland yield even greater benefits than the last four decades."
The decision announced in the March 2011 Budget, without prior consultation, to raise the Supplementary Charge from 20 per cent to 32 per cent means North Sea operators face an overall tax rate of 81 per cent for fields given development approval before March 1993 and 62 per cent for fields approved after this date. The uniform increase in the Supplementary Charge on all fields and investments, regardless of their potential profitability, means many marginal investments are no longer considered viable.
The Scottish Government submitted an options paper to the UK Chancellor in June with detailed recommendations to mitigate the impact of the tax hike and in September the First Minister proposed the introduction of a statutory consultation period of a year before changes to oil and gas taxation are applied, in order to restore certainty and confidence.