Osborne’s oil and gas tax cuts biased?

The recent oil and gas tax cuts announced by Chancellor George Osborne are “biased towards older, existing assets”, according to an energy analyst.

Mr Osborne said he will cut the Supplementary Charge on oil and gas from 20% to 10% and scrap the Petroleum Revenue Tax (PRT).

The PRT is a special tax on profits from oil and gas production in the country or the UK Continental Shelf and is applicable only to projects given development consent before March 1993.

According to Erik Lambert, GlobalData’s Upstream Fiscal Analyst, the move would also reduce the headline rate of tax paid on UK oil and gas production from 50% (or 67.5% for older fields) to 40%.

Additionally, it could see values of some new developments and mature fields rise by up to 20% and 70%, he adds.

Mr Lambert claims the impact of the cuts will vary significantly, “particularly considering many fields are already untaxable due to the low oil price”.

He believes further cost cuts will be needed to improve project economics and producer profits on the UK Continental Shelf and in turn generate government tax revenue.

He added: “Other fiscal incentives announced in the budget include measures which attempt to contribute to the government’s Maximizing Economic Recovery (MER) strategy for offshore oil and gas reserves.

“For example, the government intends to include tariff income in the definition of ‘relevant income’, which activates the Investment and Cluster Area Allowances for the Supplementary Charge, to support infrastructure development. The UK Government also made clear that firms retaining the decommissioning liabilities for assets would receive tax relief on these costs.”

Mr Lambert went on: “Overall tax revenues from the North Sea turned negative in the first half of the 2015/2016 financial year and the Office for Budget Responsibility is forecasting negative revenues for the next five years. While the headline tax cuts have further improved the UK’s globally competitive fiscal regime, they do little to address relatively high development costs in a mature basin.”