Scottish Government
Printable version E-mail this to a friend

Oil and gas industry

Speaking after a meeting in Aberdeen on Monday with Malcolm Webb, chief executive of the industry body Oil & Gas UK, and Gordon Ballard, co-chair of the organisation's Board - and on the eve of the Offshore Europe conference in the City - First Minister Alex Salmond called on the UK Government to introduce a period of statutory consultation on proposed changes to the offshore taxation regime.

The FM said such a step was necessary in order to give greater certainty and restore investor confidence to the North Sea oil and gas industry, following the increase in the Supplementary Charge in this year's UK Budget, with no consultation.

Industry experts have warned that the increase in the Supplementary Charge (SC), from 20 to 32 per cent, is damaging investment, particularly in the most challenging and mature fields.

Analysis by Professor Alex Kemp and Linda Stephen at Aberdeen University suggests that there could be 79 - or 8 per cent - fewer fields developed, and £29 billion less investment over the next 30 years as a result of the tax increase, with a corresponding impact on production levels.

The Scottish Government sent the Chancellor a paper in June with detailed options to mitigate the impact of the tax hike, and has not yet received a substantive response to the proposals.

Mr Salmond said:

"The North Sea oil and gas industry provides jobs, investment, and so far over £300 billion worth of tax revenue for the UK Government - with the Treasury due an estimated £13.4 billion this year, or double last year's tax take.

"With up to 40 per cent of oil and gas reserves still to be extracted, and perhaps more than half of the revenue still to be generated, it is vital that the UK Government takes urgent measures to give more certainty to the industry and restore confidence that has been badly dented by the Treasury's conduct.

"The Chancellor's shock decision to increase the Supplementary Charge on the North Sea oil and gas profits, without any consultation, has done great damage. The decision was described by Chief Secretary Danny Alexander as 'absolutely right', despite clear evidence that it would lead to fewer new fields being developed, and greater reliance on more expensive foreign imports.

"What needs to happen is a new initiative, and I am now calling on the Chancellor to establish a procedure for a statutory consultation period of a year before applying changes to oil and gas taxation, in order to restore much-needed certainty and confidence and undo the damage caused by the Treasury's cack-handed conduct.

"This new approach would enable UK Ministers to think through the consequences of their proposals for a sector that is one of the greatest industrial success stories of our generation.

"The alternative to this approach is a new North Sea boom being threatened by a UK Government which runs the risk of killing the goose that lays the golden egg. At present, we have the ridiculous irony of the Chief Secretary talking in terms of declining North Sea revenues, when the circumstances of this happening are the very tax policies that his government at Westminster are presiding over.

"The issue is not just one of the level of taxation - as the generally tighter fiscal regime in the Norwegian sector demonstrates. The nature of the offshore industry means that the issue is also about measures to incentivise investment decisions for the long-term, affecting thousands of jobs.

"The Treasury introduced their tax increase with no consultation, without doubt resulting in the cancellation of projects that would otherwise have gone ahead. This is all unnecessary, and puts at risk a new boom that can be generated with the right environment and taxation regime.

"It is essential that investment in the more marginal fields, where exploration and extraction is technically more difficult, is not penalised and deterred. With investment, the oil and gas sector will continue to sustain hundreds of thousands of jobs for many years to come - and the Chancellor and his colleagues must set out measures to restore that investor confidence now."

In 2011-12, North Sea oil and gas is forecast to generate £13.4 billion in tax revenue, a record high in nominal terms. And over the five years from 2011-12 to 2015-16 it is forecast to raise £61 billion in tax revenue, 35 per cent more than during the previous five years.

The decision announced in the March 2011 Budget, without prior consultation, to raise the Supplementary Charge from 20 per cent to 32 per cent means North Sea operators face an overall tax rate of 81 per cent for fields given development approval before March 1993 and 62 per cent for fields approved after this date. The uniform increase in the SC on all fields and investments, regardless of their potential profitability, means many marginal investments are no longer considered viable.

Offshore Europe is a three day oil and gas conference attracting a global audience of industry leaders, engineers and technical specialists who meet to share ideas and debate issues relating to the oil & gas industry.

Related Information

The PPM Benchmarking Report 2019...find out more and download now...