Tax shake-up to slow oil decline

A NEW stimulus package to boost production of North Sea oil was unveiled by the Treasury yesterday.

The proposed reforms are designed to reduce the overall tax paid by companies and encourage oil firms which have been hit by falling prices and spiralling costs to drill for ‘black gold’ in the North Sea.

They include plans to introduce a single ‘basin-wide’ tax relief for all oil fields. The Government hopes that by simplifying the complex system of tax incentives it can encourage investment, and slow the dramatic decline of North Sea oil production which has blown a hole in the nation’s finances.

It said it would also consult with the industry – which boasts some of Britain’s biggest quoted companies – on measures to stimulate exploration, including financial support and tax credits for seismic surveys in underexplored offshore areas.

Other incentives include allowing oil firms to cut their tax bill by offsetting costs against profits for up to ten years instead of the current six-year period.

Chief Secretary to the Treasury Danny Alexander announced the package during a meeting in Aberdeen with representatives from the oil industry, and said it would be finalised by next March’s Budget.

Describing it as an ‘ambitious package to continue to support this hugely valuable sector’, he said: ‘We’re incentivising and working with the industry to develop new investment opportunities and support new areas of exploration. This will help ensure that the industry continues to thrive and contribute to the economy.’

The plans failed to cheer investors with shares in Tullow Oil (12.2p lower at 408.9p), BP (9.95p worse at 426.9p), Shell (30p lower at 2229p) and Petrofac (15p down at 791.5p).

But the measures were given a cau- tious welcome by the oil industry. Malcolm Webb, chief executive of industry group Oil and Gas UK, said: ‘We are encouraged to note that fiscal policy will now be framed in the context of the sector’s wider economic benefits and will also take account of the global competitiveness of the industry in terms of commodity prices and costs.’ Chancellor George Osborne announced a first attempt at tackling the oil and gas tax regime during Wednesday’s Autumn Statement when he introduced a two percentage point cut in a supplementary oil tax charge.

This reduces the tax charge for most firms from 62pc to 60pc.

The stakes are high, with the drop in production and a fall in prices cutting tax receipts. This week the Treasury’s independent watchdog, the Office for Budget Responsibility (OBR), cut its forecasts for tax receipts from oil and gas for 2015/16 to £2.8bn – down £1.6bn from its March prediction.

This marks a dramatic decline from £12.4bn in 2008/9 when oil hit $147 a barrel. The oil price has fallen 40pc since July, hitting $69.50 yesterday.

An independent review carried out by oil industry veteran Ian Wood estimated in February that around £200bn worth of oil and gas is still trapped in the North Sea.

The OBR estimates that stimulating high levels of production could bring in £28bn in extra tax income between 2020 and 2040.