Insights

UKCS oil and gas fiscal framework: is it fit for purpose?

Making the most of the UKCS

October 2014

The United Kingdom Continental Shelf (UKCS) fiscal framework is perceived by industry as an unpredictable, unstable and complex regime, according to Deloitte’s oil and gas survey.

As the UKCS matures, challenges mount and urgent and wide-ranging industry reform is necessary. Getting the fiscal regime right is vital but the changes must be made in the context of Sir Ian Wood’s UKCS Maximising Economic Recovery Review (Wood Review).

The key challenges of the current fiscal system and potential fiscal levers to address these challenges in the UKCS are highlighted in Deloitte’s Making the most of the UKCS – The oil & gas fiscal framework: Is it fit for purpose? report.

Report findings

Challenging fiscal environment

The concern is that the following issues with the current framework will diminish the attractiveness of the basin to international investment, which is critical for the basin’s future:

  • High levels of taxation
  • Lack of stability
  • Complexity of the regime
  • Lack of support for new entrants and for stimulating industry collaboration.
Potential fiscal levers

The survey results show some potential actions that could bring material benefits to HM Treasury and the companies operating in the UKCS:

  • Reduce headline tax rates to new/more generous field allowances
  • Use cash back to incentivise exploration and appraisal in the UKCS
  • Retain the 100% first year capital allowances
  • Consider easing on taxation of infrastructure to facilitate changes in ownership
  • Keep gas subject to the same tax rules as upstream oil to avoid unnecessary complication.

Context

Responding to the UKCS mature basin challenges will require close collaboration between the government and the industry. In addition, specific sector strategies on infrastructure, exploration and regional cooperation identified in the Wood Review will also need to be addressed.

The next two years will be crucial for the oil and gas industry. Although the Scottish independence vote is now cast, there remain a number of macro uncertainties that will all affect the future of the North Sea. While the size of the price is still substantial, actions that HM Treasury, OGA and the industry take now will have a major impact on the pace of the basin’s decline.

Notes

The Deloitte oil and gas survey was originally conducted for a presentation by Roman Webber, UK Leader – Energy & Resources Tax, at the Oil & Gas Industry Conference in Aberdeen on 12 June 2014.

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