UK Chancellor Throws Billion-Pound Lifeline to North Sea Oil Industry

North Sea oil
A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland February 24, 2014. Andy Buchanan/pool/REUTERS

More than £1 billion in tax breaks for North Sea oil companies was promised in the UK budget today in a move which experts hope will pull the struggling oil and gas industry from the brink.

In the final budget statement before May's general election, British chancellor George Osborne announced measures which he said amounted to £1.3 billion of support for the industry.

The North Sea industry had been hit hard by the falling price of oil, which has plummeted to around $50 per barrel, a drop of around 60% since last summer. The price crash has put jobs at risk as the companies struggle to break even.

Osborne announced an immediate cut in the supplementary tax, paid by oil and gas firms on top of corporation tax, from 30% to 20% backdated to January. He also said a "single, simple, generous tax allowance to stimulate investment" would be implemented from next month.

The breaks are predicted to boost oil production by 15% by the end of the decade, according to the government's financial watchdog, the Office for Budget Responsibility.

Malcolm Webb, chief executive of trade association Oil and Gas UK, welcomed the measures, saying they would contribute to the preservation of the industry. "Today's announcement lays the foundations for the regeneration of the UK North Sea," Webb said. "The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness."

The firm estimated that the measures could generate an additional £4 billion short-term investment in the industry, allowing for the production of 500 million barrels of oil.

"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," said Webb.

The announcement was also well received by Julian Small, global oil and gas tax leader at auditors Deloitte. He said: "Today the Chancellor has recognised that immediate action was required to extend the life of the North Sea. The changes announced are bold and a big step in the right direction. Without significant action, the consequences for future activity levels would have been severe."

Other measures announced by the chancellor include a fall in Petroleum Revenue Tax, the tax on profits from oil and gas production, from 50% to 35% from next year, while the government will also invest in additional exploration in unmined areas of the UK continental shelf (UKCS), the mineral-rich area of waters surrounding the country.

In their 2015 activity report, trade association Oil and Gas UK recorded £24.4 billion production revenues last year, the lowest since 1998, with a record amount being spent on decommissioning facilities. Only 14 of an expected 25 wells were drilled in 2014, compared with 15 in 2013, continuing a trend of decline which began in 2009.

Auditors PwC reported in 2012 that the oil and gas sector is the UK's largest contributor of corporation tax, paying 16.4% of total corporation tax receipts. The industry pays an estimated £30.1 billion in total taxes, more than 5% of the UK's total tax revenues.

However, sector trade unions say that the cuts leave the rights of workers on the offshore oil rigs unaddressed.

Pat Rafferty, Scottish secretary of Britain and Ireland's largest trade union Unite, said the tax break must lead to better working standards in the industry. "This must end the opportunistic assault on the jobs, terms and conditions of thousands of offshore workers and kick start investment in drilling and exploration," said Rafferty.

"We are clear that economic reform of the North Sea must go hand-in-hand with sustaining jobs and strengthening employment and workplace health safety rights."

Mick Cash, general secretary of the offshore branch of the National Union of Rail, Maritime and Transport Workers (RMT), which has more than 80,000 members, said the relief would only benefit oil and gas companies and would leave British workers vulnerable to being undercut by lower-paid foreign employees.