UK offshore oil and gas industry

The UK offshore oil and gas industry

State of the industry

The UK offshore oil and gas industry is important to the economy. The industry contributed some 0.8% of GDP in second quarter 2015, down from a high of 2.5% in second quarter 2008. It supported around 370,000 jobs in 2015 falling to 330,000 in 2016.

However, production levels of oil and gas from the UK Continental Shelf (UKCS) are in decline, though there was a modest increase in 2015.

Oil prices rose from $28 per barrel (bbl) in 2000 to highs of $111/bbl in 2011-12 before falling slightly in 2014 and then rapidly to just over $50/bbl in 2015.

Against declining oil and gas production, rising prices over most of the period meant industry income in the period remained at between £25 billion and £30 billion a year between 2000 and 2013 but declined to just under £20 billion in 2015.

Tax revenue made an average annual contribution over the 10 years 2004/05 to 2013/14 of £7.4 billion, it declined rapidly to just over £2 billion in 2014/15 and to almost zero in 2015/16.

Changing regulatory framework

The Government’s Energy Act 2016  of 12 May 2016 responded to the need to maximise the economic recovery of oil and gas in the UK Continental Shelf (UKCS), the Act:

• formally transferred the licensing, exploration and development functions previously carried out by the Department for Business, Energy and Industrial Strategy (BEIS) to the Oil and Gas Authority (OGA).
• established the OGA as an independent regulator and a government company; it has up and until now operated as an executive agency within BEIS.
• In the Scotland Act 2016, regulation and licensing of offshore energy is a reserved matter, this is regardless of which country the waters belong in the UK.

Industry challenges

The principal challenges facing the industry include:

• the level of investment in the UK Continental Shelf (UKCS);
• declining tax revenues but the need for a fiscal regime that supports investment; and
• the growing pace of decommissioning while ensuring that the remaining infrastructure supports new developments where necessary.In Budget 2016, on 16 March 2016, the Chancellor of the Exchequer announced reductions in taxation for North Sea oil and gas fields, he said the Government will:

Recent Government announcements

In Budget 2016, on 16 March 2016, the Chancellor of the Exchequer announced reductions in taxation for North Sea oil and gas fields, he said the Government will:

• effectively abolish Petroleum Revenue Tax by permanently reducing the rate from 35% to 0%, to simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments. The change will take effect from 1 January 2016

• reduce the Supplementary Charge from 20% to 10%, to send a strong signal that the UK is open for business and in recognition of the exceptionally challenging conditions that are currently facing the sector. The change will take effect from 1 January 2016.^[1] 

In Spring Budget 2017, on 8 March 2017, the Treasury announced the fiscal regime needs to ensure support for the transfer of late-life assets as part of the objective of maximising economic recovery of oil and gas from the UKCS.[2] To determine the best approach, the Government has published a formal discussion paper on the case for allowing transfers of tax history between buyers and sellers.^[3] The Government is establishing a new advisory panel of industry experts to ensure appropriate scrutiny of the options arising from the discussion paper. The review will report at Autumn Budget 2017 [4]

[1]     HM Treasury Budget 2016 16 March 2016

[2]     HM Treasury Spring Budget 2017 para 3.29, 8 March 2017

[3]     HM Treasury Tax issues for late-life oil and gas assets: discussion paper 14 March 2017

[4]     HM Treasury Spring Budget 2017 para 3.29, 8 March 2017