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LONDON (Alliance News) - UK Chancellor of the Exchequer George Osborne Wednesday said he will introduce four measures that will offer GBP1.3 billion of support to the UK oil and gas industry in the North Sea and boost production by 15% by the end of the decade.
"It's clear to me that the fall in the oil price poses a pressing danger to the future of our North Sea industry unless we take bold and immediate action. I take that action today," said the Chancellor.
The Chancellor said he would introduce a "single, simple and generous" tax allowance for the North Sea oil and gas industry from the start of April to stimulate investment at all stages of the industry and simplify the existing offshore field allowance and provide greater certainty for investors.
Osborne also said he will reduce the petroleum revenue tax to 35% from 50% from the beginning of 2016 in order to support continued production from older fields in the North Sea and the key infrastructure they support.
With immediate effect, the Chancellor further cut the supplementary tax from 30% to 20%, and said this can be back-dated to the start of January.
In 2014, the Chancellor cut the supplementary charge rate for the North Sea to 30% from 32% from the beginning of January 2015.
FinnCap said the tax measures are "a bit of a token gesture given that the majority of UK Continental Shelf producers do not pay tax due their accumulated tax losses, credits and capital allowances", adding that it was "useful, but not really what we needed to see."
In addition, the government committed to funding up to GBP20 million for seismic surveys in unexplored areas of the North Sea in an attempt to de-risk areas and make them more attractive to companies.
In total, Osborne said the measures being taken will contribute GBP1.3 billion of support for the industry, and said according to the Office for Budget Responsibility figures, the measures Osborne announced today will boost production in the North Sea by 15% before the end of the decade, he said.
"This package is expected to lead to over GBP4 billion of additional investment over the next five years and at least 120 million barrels of oil equivalent of additional reserves, increasing production by 15%, the equivalent of 0.1% of gross domestic product, by 2019/2020," said Scottish Secretary Alistair Carmichael in his own statement.
"It will provide certainty for investors and create the right conditions for the basin to flourish and deliver maximum economic benefits for the UK," added Carmichael.
FinnCap said what the UK offshore oil and gas industry needed was something like a Resource Rent Tax which is based upon achieved profitability compared to the current tax regime that is only applied once a threshold rate of return is passed and is applied in conjunction with corporate tax.
"This is the model which Australia has used for decades and was instrumental in establishing the various liquefied natural gas projects on the west coast. Previously, the UK also used this method, before converting to the regressive tax focused fiscal regime we have today," said FinnCap.
"Things have to change if we are serious about prolonging the life of the life of the North Sea and encouraging investment in what is still a very important part of our economy," added FinnCap.
Most oil and gas fields in the North Sea are ageing and becoming more expensive to maintain. The recent sharp slide in oil prices to about USD53 a barrel, from over USD115 a barrel last June, has put pressure on the North Sea operators and threatens tax revenue from a source that is still important to the UK's overall tax receipts.
In response the budget measures, Peel Hunt increased Faroe Petroleum PLC's target price to 130 pence from 120 pence. It said there is no impact from the reduction in the petroleum revenue tax because Faroe has no qualifying producing assets, but the other measures that Osborne announced will benefit the company.
Peel Hunt also increased Ithaca Energy's target price to 85 pence from 80 pence following the budget.
"The new fiscal measures will also be supportive for all other exploration and production companies that have UK Continental Shelf assets, both public and private," said Peel Hunt.
Peel Hunt highlighted that Tullow Oil PLC, Cairn Energy PLC, Premier Oil PLC, Hurricane Energy PLC, Enquest PLC, Parkmead Group PLC and Xcite Energy PLC all were companies operating in the North Sea that will benefit from the new measures introduced.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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