The new UK government needs to develop a more predictable tax regime for North Sea oil and gas investors, according to analysis by Wood Mackenzie.
While the government has stated that oil and gas production in the North Sea will continue to be needed for the next few decades, its planned modifications to the Energy Profits Levy (EPL) – introduced by the previous Conservative administration and currently set to end in 2030 – is causing widespread concern in the industry.
Details of the planned changes will be confirmed in the UK Chancellor’s Budget statement on Oct. 30, which may also firm up the timeline for establishing a successor to the EPL.
For the industry to obtain the predictable fiscal system it has long been calling for, government engagement should address the following issues, Wood Mackenzie says:
- Defining what is a price ‘shock’ and its duration
- Determining the appropriate government share that may be applied during a price shock and how, or if, it should vary. This could include a simple on/off switch, or stepped rate increases
- Deciding whether to target solely excess income or applying a measure to a company’s entire taxable income (the current practice)
- Creating a system that taxes companies in a fair way on both oil and gas production, since the prices can fluctuate in opposite directions
- Simplifying the current tax system.
Solutions also need to be predictable, transparent, simple to administer and self-adjusting during periods of price volatility to minimize the need for further government intervention, the analysis found.
Graham Kellas, Senior Vice President, Global Fiscal Research at Wood Mackenzie, said: “North Sea oil and gas operators are trying to make long-term financial decisions beyond 2030, but the current fiscal regime does not allow for such clarity.
“Price responsiveness, predictability, fairness, simplicity and transparency must all be considered to ensure the correct outcome is reached at what is a crucial juncture for the sector. This will be a difficult conversation, with the mechanisms required for an improved system complicated by having to negotiate the myriad of economic outcomes and investor types.
“But this must be tackled, and a solution found, quickly. Achieving consensus on the issues will be highly challenging, not just between industry and government, but between the companies themselves.”
