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Budget 2016: North Sea tax relief

The UK’s oil and gas industry asked for tax cuts, and for the second year in a row, that’s what it got.
March 16, 2016

The UK’s oil and gas industry asked for help, and for the second year in a row, that’s what it got. In his eighth budget as Chancellor, George Osborne announced a further £1bn package of tax cuts for struggling North Sea producers, following another 12 months of low oil prices.

There are two elements to the cuts: a halving of the supplementary charge on ring-fenced oil and gas profits to 10 per cent, and the abolishment of the petroleum revenue tax, a levy on profits from oil fields approved before 1993.

Following the announcement, industry lobby group Oil & Gas UK – which last month pleaded for a significant and permanent reduction in North Sea levies on top of last year’s £1.3bn package of tax breaks – said it welcomed “any steps to reduce the heavy tax burden”.

The tax cut led to a bounce in the shares of North Sea drillers Cairn Energy (CNE), Premier Oil (PMO) and Ithaca Energy (IAE), all of which are down heavily since oil topped $115 a barrel in summer 2014. There were smaller gains for Enquest (ENQ) and Faroe Petroleum (FPM), both of which have wells in the North Sea.

But with Brent crude stuck at, or below, $40 a barrel, these cuts won’t make fields profitable. Indeed, for many producers, there isn’t exactly a surfeit of profits to tax: Oil & Gas UK itself estimates that just under half of North Sea fields are loss-making or making no money at current prices. Neither is Mr Osborne’s announcement likely to stem the precipitous drop in investment, which is expected to fall below £1bn this year, compared with an annual average of £8bn over the last five years.

Regardless, the Chancellor again used the announcement to exaggerate a political point. He made reference to the “hundreds of thousands of people in Scotland and across our country” employed by the sector, and suggested the cuts were only affordable because Scotland voted against independence in 2014’s referendum.

Scotland’s Deputy First Minister John Swinney was among those asking the Chancellor to encourage exploration via a lower tax regime.