U.K. Cuts Tax on North Sea Drillers Squeezed by Slump in Oilby
Shares of independent oil companies in region jump on news
One-time Treasury `golden goose' weighed down by rising costs
The U.K. cut taxes on the North Sea oil and gas industry, forgoing revenue of 1 billion pounds ($1.41 billion) over the next five years, as Chancellor of the Exchequer George Osborne seeks to ease the strain on producers squeezed by plunging prices.
The corporate tax rate for all fields will be cut to 40 percent from 50 percent for newer fields and 67.5 percent for older ones, after Osborne cut a supplementary charge by half to 10 percent. He also scrapped the Petroleum Revenue Tax in another change that will be backdated to January.
Osborne’s move comes after the 60 percent slump in Brent crude since mid-2014 made much of the production in the U.K.’s North Sea basin -- once the Treasury’s “golden goose” -- uneconomic as costs escalate at aging fields.
“We need to act now for the long term,” Osborne said in his annual budget speech, adding that the oil and gas industry employs “hundreds of thousands of people” across the country.
Shares of independent oil companies operating in the U.K. North Sea rose on the news. Cairn Energy Plc climbed 6.7 percent as of 3:57 p.m. in London while Premier Oil Plc surged 11 percent.
The U.K. has more tax revenue to gain by protecting jobs in the sector, Alan McCrae, U.K. head of energy tax at PricewaterhouseCoopers LLP, said by e-mail. “This is aimed at stimulating investment at a time when the industry desperately needs it,” he said.
More than 60,000 jobs supported by the U.K. oil and gas industry have been lost since the start of 2014, lobby group Oil & Gas U.K. said in September. Since then, BP Plc announced plans to cut 600 jobs in the North Sea alone. Oil & Gas U.K. has forecast a 22 percent slump in capital expenditure in the region this year as dwindling revenue forces operators to retrench or suspend projects.
While welcoming the tax cuts, Derek Leith, head of oil and gas tax at Ernst & Young LLP, said they don’t go far enough. From 2020, the corporate tax for most U.K. companies will be 17 percent, less than half the 40 percent rate for the oil and gas industry.
Osborne left gasoline and diesel taxes unchanged for the sixth year.