WIREDGOV

Urgent change to Exploration Tax Regime is needed.

Urgent reform of the oil and gas taxation regime is necessary in order to support investment, encourage exploration and ensure that the North Sea is a competitive investment location, Energy Minister Fergus Ewing said.

The new Scottish Government Oil and Gas Discussion Paper - Challenges, Opportunities, and Future Policysets out clear proposals for fiscal change, including a call for the introduction of an exploration tax credit by the March 2015 Budget. The call comes ahead of a visit by the First Minister to Aberdeen this week to hold talks with industry figures.

While all of the measures outlined in the Scottish Government paper, such as a reduction in the headline rate of tax and introduction of an investment allowance, will increase the attractiveness of North Sea exploration projects and enhance the competitiveness of the sector. The exploration tax credit has the potential to substantially and rapidly boost exploration activity.

Speaking ahead of a trip to London to promote investment in Scotland’s energy sector Mr Ewing said:

“Exploration rates in the North Sea are at historically low levels. If action is not taken, this will reduce the number of new discoveries, and in turn future production. While this is not simply a fiscal issue, urgent fiscal stimulus is required to improve the exploration outlook.

“In 2013, Oil and Gas UK reported that around 25 per cent of exploration wells were drilled by small to medium sized companies. However, the tax arrangements currently in place do not provide support to new entrants or smaller companies who generally do not have sufficient taxable profits against which to offset their exploration expenditure and in many cases can face constraints in their access to finance.

“The fiscal regime remains the single largest barrier that is holding back exploration activity. A cashable tax credit should be available for exploration activity, as it will encourage further activity by many exploration companies who are currently cannot access tax relief available to incumbent companies.

“The measure has had a significant effect in Norway, which saw a substantial increase in exploration activity by both incumbent companies and new entrants. In Norway, exploration drilling was in a gradual decline before 2005, however following the introduction of the tax credit in 2005 the number of exploration wells increased fourfold over the next 3 years. As a result, in recent years Norway has seen major discoveries such as Johan Sverdrup field and the Johan Castberg field.

“We will continue to call on the UK Government to maintain the momentum for fiscal and regulatory change in the oil and gas sector, both of which also were recognised by Sir Ian Wood as, critical to prolonging the life of the industry beyond 2050 and maximising the total value generated in the economy.”

Notes To Editors

The three key proposals are:

• An investment allowance to provide support for fields that incur higher costs to develop;
• A phased and timetabled reversal of the increase in the Supplementary Charge implemented by the UK Government in 2011; and
• Introduction of an exploration tax credit to help increase levels of exploration and sustain future production.