Oil and gas fiscal reform

Following the Chancellor’s Autumn Statement, the UK government announced yesterday (04 December 2014) the conclusions of its review of the oil and gas fiscal regime. The publication of HM Treasury’s report entitled “Driving investment: a plan to reform the oil and gas fiscal regime” unveiled a significant set of reforms for the industry, designed to support the government’s dual-objectives of maximising the economic recovery of hydrocarbon resources whilst ensuring a fair return on those resources for the state.

At Budget 2014 the Chancellor announced that a review of the fiscal regime would take place to ensure that the UK Continental Shelf (UKCS) remains a competitive environment in the context of global investment, and to ensure consistency with the approach recommended in Sir Ian Wood’s Report on Maximising Economic Recovery (for our earlier Law Now on the Wood Review click here).

The outcome of the fiscal review, which involved engagement of key stakeholders through a consultation with industry throughout summer 2014, proposes a set of radical reforms. The changes are intended to respond to the key challenges facing the industry, such as encouraging investment and exploration in under-explored and high risk areas, promoting stewardship of infrastructure assets and ensuring a framework for cost-effective decommissioning.

The key changes introduced in the report, in a timeline of process, are as follows:

• From 5 December 2014 there will be an immediate extension of the ring fence expenditure supplement to ten accounting periods to support companies already investing in the UCKS.
• From 1 January 2015 there will be a 2% reduction to the rate of the Supplementary Charge from 32% to 30%. The government’s ambition is to reduce the rate further in future and to continue to demonstrate its commitment to incentivising investment as the basin matures and discoveries become more challenging to develop.
• In early 2015 a consultation will be published on the introduction of a basin-wide ‘Investment Allowance’ to reduce the effective tax rate further for those companies investing in the future of the UKCS.
• At Budget 2015 details of financial support for seismic surveys in under-explored areas of the UKCS will be set out. The government will work with industry on options for shared funding models.
• Once the new Oil and Gas Authority (OGA) is established in 2015 further discussion on options for supporting exploration through the tax system will take place with industry, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable.
• Later in 2015 further consultation with industry is also intended to develop options to improve access to decommissioning tax relief. Work will take place with the OGA to consider options for reforming the fiscal treatment of infrastructure.
• On a long term basis, Petroleum Revenue Tax and Supplementary Charge will remain subject to review with the intention of reduction as fiscal conditions allow.

The reforms are intended to make the fiscal regime more predictable, providing stability and certainty in the long term. They represent the government’s view of the most balanced and investment-focused way to move to a lower tax burden over time.

The proposals also reflect the government’s commitment to the approach recommended in the Wood Review to adopt a new tri-partite strategy for Maximising Economic Recovery (MER) from the UKCS involving engagement of government, industry and the new independent regulator. The report acknowledges that government and regulatory action must be matched by the actions of the industry, and states that industry will be expected to make significant improvements in production operations, cost-efficiency and commercial practices in line with the MER objectives. OGA will play a role in monitoring and reporting on industry’s progress in these areas.

The report notes that the government estimates that there remain between 11 and 21 billion barrels of oil equivalent (boe) offshore, of which industry experts estimate around 15 to 16.5 billion boe is economically recoverable. It is anticipated that these fiscal reforms will go towards supporting billions of pounds of investment throughout the lifecycle of fields.