George Osborne's moves on the North Sea tax regime, though not overly generous, will be welcomed by the UK oil and gas industry. The only problem is that they've probably come about five years too late.
The chancellor said that a "single, simple and generous tax allowance" will come into force from April in order to stimulate investment. There was a vague commitment to fund new seismic surveys in under-explored areas of the UK Continental Shelf. The Petroleum Revenue Tax is to be cut from 50 to 35 per cent to support continued production in mature fields, while the supplementary levy has been cut from 30 to 20 per cent. Mr Osborne said the measures amount to a £1.3bn boost for the industry. And the Office for Budget Responsibility estimates that the changes could generate a 15 per cent rise in North Sea oil production volumes by the end of the decade.
The industry won't exactly be overflowing with gratitude over the reduction in the supplementary levy, because it merely reverses an earlier tax grab initiated by the chancellor back in 2011. That move was seen by the industry as highly detrimental, not simply because of the tax increase itself, but because it removed certainty from investment decisions. Overnight, oil companies became less inclined to sanction long-dated capital projects for fear that the Treasury would launch opportunistic tax raids.
On balance, we think that the chancellor has been rather too timid. North Sea production is about half its peak rate of the 1990s, when taxes provided a boon for state coffers. Those days are gone, but by facilitating industry extraction of our remaining North Sea energy assets, the Treasury could ensure other economic benefits away from source. For a start, it would have a significant effect on the UK's balance of trade over the next 20 years, in addition to the tax receipts generated by thousands of oil workers now in danger of redundancy.
