Why Do North Sea Companies Need £450 million Tax Break?

In Dec 2014, the UK government introduced tax breaks of £450m to help North Sea oil companies during a period of increasing costs, plummeting prices and declining outputs.

In his Autumn statement, chancellor George Osborne said that a "supplementary charge" rate would be cut from 32% to 30%, that other breaks would be extended from six to ten years and that a new allowance targeted on certain areas would be provided. Osborne claimed that these tax breaks demonstrate the government's commitment to the tens of thousands of workers dependant on the oil industry.

However, some industry experts are warning that the government's actions may prove insufficient in the face of such uncertainty within the industry.

Why are such tax breaks needed?

Many companies such as Maersk Oil and the industry's lobby group, Oil & Gas UK have welcomed the move overall, but feel that further commitments must be made to safeguard the industry’s future.

Chief executive of Oil & Gas UK, Malcolm Webb has warned that oil exploration is at a "crisis", stating, “These can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea. We will certainly need further reductions in the overall rate of tax to ensure the long term future of the industry.”

Roman Webber, an energy expert at accountants Deloitte, expressed further caution on the current low level of exploration activity, saying: “With a number of UK North Sea fields up for sale the risk remains that the current low exploration activity will continue, with companies choosing to invest in countries where financial returns may be more robust and the upstream tax system is more predictable. We will need to see the detail of the proposals tomorrow to understand if today’s measures and the future proposals are enough to safeguard North Sea jobs and future tax flows to the exchequer.”

Meanwhile, managing director of Wood Group Intetech, Liane Smith feels that the government has done "too little to have the kind of impact needed” following a 30% drop in oil prices since June. She said, “The UK has to be competitive in a global market. We have to do more to support the industry. If operations are suspended, the costs of recommissioning can be prohibitive.”

Currently, oil and gas firms may be adopting a “wait and see” approach before making further investment decisions in the North Sea, according to a new report from business advisory firm Deloitte (UK). To read more about this topic, read: Combination of Factors sees Drop in Deals and Drilling in North Sea.  

Tax breaks met with criticism from Greenpeace

Following the tax break introduction, environmental organisation, Greenpeace suggested that the support offered to the oil industry was unwise, and that the government should instead support renewable technologies in a bid to tackle climate change. Greenpeace’s chief scientist and policy director, Doug Parr said in a statement, "Our clean energy sector accounted for a third of all growth in the last year. Yet this massive hand-out to his polluting mates is yet another obstacle thrown in the path of Britain’s green industries.

“(George Osborne) should be channelling Treasury support to the new, clean twenty-first century industries, like renewable energy, instead of throwing our money at a declining industry in the North Sea in an attempt to get every last drop of oil.”