The existing tax regime for exploration and production of oil and gas in the UK and UK Continental Shelf ("UKCS") comprises three elements:
(i) Petroleum Revenue Tax ("PRT") at a rate of 50% which is levied on profits from fields given development consent before 16 March 1993;
(ii) Ring Fence Corporation Tax at a rate of 30% levied on the post-PRT profit of companies engaged in oil and gas extraction activities; and
(iii) Supplementary Charge at a rate of 30% (with effect from 1 January 2015, prior to the 2014 Autumn Statement this was levied at a rate of 32%) which is levied on the post-PRT profit of companies engaged in oil and gas extraction activities,
which results in a headline effective tax rate of 80% (for PRT-paying fields) or 60% (for non-PRT-paying fields). The combination of the existing tax regime and the recent decline in the oil price has raised widespread concerns within the industry and government that exploration and development operations in the UK will be curtailed and ageing fields will be decommissioned earlier than expected.
In a move aimed at stimulating exploration and development and extending the life of more mature fields, the UK Treasury has announced a raft of tax relief measures for UK E&P in the 2015 Budget to Parliament. Specifically the Treasury has announced:
- PRT: PRT will be reduced from 50% to 35% and will have effect from 1 January 2016. The aim of the reduction is to encourage investment in incremental projects in older fields and extend the life of key infrastructure needed to make small new discoveries commercially viable.
- Supplementary Charge: Further to the 2% reduction announced at 2014 Autumn Statement, the Supplementary Charge will be reduced from 30% to the pre-2011 rate of 20% with effect from 1 January 2015. The Treasury has stated that this reduction is designed to "send a strong signal that the UKCS is "˜open for business' and ensure it remains competitive as the basin matures."
- Investment Allowance: An Investment Allowance exempting a portion of profits equal to 62.5% of a company's qualifying investment expenditure from the Supplementary Charge will be available for projects in both new and existing fields. The allowance will apply to investment expenditure incurred on or after 1 April 2015 and is aimed at encouraging new investment in the UKCS and simplifying the existing system of offshore field allowances.
- Seismic Surveying: The government plans to provide £20 million of funding in 2015-16 for a programme of seismic and other geoscientific surveys to increase exploration in under-explored areas of the UKCS. The funding will be allocated to DECC/the Oil and Gas Authority who shall commission a programme of seismic and other geoscientific surveys (which is expected to take place in Summer-Autumn 2015).
- Decommissioning: In addition to DECC's power to scrutinise companies' plans for decommissioning programmes to ensure they consider the environmental impacts, the Oil and Gas Authority will also have the powers it needs to ensure such plans are also cost effective. The government is also going to work with the Oil and Gas Authority and the industry to ensure the supply chain is equipped to take up the opportunities offered by timely decommissioning.
- Cluster Area Allowance: In the last Autumn Statement, the government announced the introduction of a new Cluster Area Allowance to support the development of high pressure high temperature projects and encourage exploration in the surrounding "˜cluster'. Following consultation, the relevant legislation has been revised to: (i) introduce a power to extend the definition of qualifying expenditure in the future by secondary legislation; and (ii) introduce a restriction for expenditure incurred on the acquisition of a licence interest.
The measures announced in the Budget are expected to be included in the Finance Bill 2015 which will be published on 24 March 2015. Further detail on these measures is available from the Treasury at https://www.gov.uk/government/publications/budget-2015-documents.
The above tax reliefs have the effect of reducing the headline effective tax rate to 67.5% (for PRT-paying fields) or 50% (for non-PRT-paying fields) and, coupled with the other measures announced, are designed to help promote exploration and development operations and the extension of the life of more mature fields, to the benefit of industry participants.
The Budget has been positively received by the oil and gas industry with Oil & Gas UK (the body representing UK offshore operators) welcoming the announcement and stating that it "lays the foundations for the regeneration of the UK North Sea" and "These measures send exactly the right signal to investors. They properly reflect the needs of this maturing oil and gas province and will allow the UK to compete internationally for investment." Further, Oil & Gas UK estimates that, in the short-term, the measures announced could incentivise an additional £4 billion of investment, enabling the development of 500 million barrels of oil which at today's prices is worth £20 billion. The full response to the Budget from Oil & Gas UK is available at http://www.oilandgasuk.co.uk/news/news.cfm/newsid/1220. E&Y commented that the measures announced are "welcome news for the UK oil and gas industry" and that "the Government has taken a big step towards creating a fiscal regime that is appropriate for the long term exploitation of the UK's natural resources."
Bracewell & Giuliani advises oil and gas companies and financial institutions regularly on North Sea transactions and has recently assisted Apache Corporation on its agreement to sell its interest in the Scott and Telford fields in the North Sea to Edison Spa.