The offshore oil and gas industry is facing a radical reform with regard to the way that the industry is taxed. The UK government plan to move away from their previous focus of maximising revenue for the Treasury, admitting that the new burden of maximising extraction will mean a lower tax burden.

Economic Benefits “For Years to Come”

The treasury minister announced on Thursday 4th December that this new support for the industry will provide economic benefits for years to come.

These radical reforms will mean that the tax burden on the oil and gas industry will be lower, encouraging investment in the North Sea, and providing significant economic benefits for the UK for the future. The reforms include the implementation of a basin-wide investment allowance, designed to reduce the tax rate for companies investing in the future of the UK Continental Shelf.

Offshore Exploration in the North Sea

This will be in addition to tax concessions announced in the chancellor’s Autumn Statement, which included an immediate cut in the supplementary charge element of offshore tax, from 32% to 30%. There will also be more flexibility in tax allowances for companies that haven’t yet seen an income from their investments. Furthermore, the government has committed to boosting offshore exploration through supporting seismic surveys in under-explored areas of the North Sea.

Reducing the Tax Burden on the Oil and Gas Industry

“The government is demonstrating its long-term commitment to supporting the North Sea oil and gas industry with a package of measures expected to drive around £7bn of additional investment,” said MP, Priti Patel. “These measures will reduce the tax burden on the industry, driving investment in the North Sea that will provide economic benefits to the UK for many years to come.”

The changes to the tax regime follow the recent review of the sector by Sir Ian Wood. The review recommended a new regulator, and a requirement that the industry, government and that regulator should be co-operating more closely.

Chief executive of industry body Oil and Gas UK, Malcolm Webb, said: “We are encouraged to note that fiscal policy will now be framed in the context of the sector’s wider economic benefits and will also take account of the global competitiveness of the industry in terms of commodity prices and costs.”

The Three Areas in the Oil and Gas Industry

Operations in the oil and gas industry can be divided into 3 main areas; surface operations, subsurface operations or down-hole operations, and offshore operations. Equipment is often exposed to severe environmental conditions including chlorides, carbon dioxide, brines, hydrogen sulphide, sea water and reef water, which can contain high levels of sulphur compounds.

In addition to this type of exposure, equipment may be exposed to abrasion problems associated with the ingestion of sand, mud, and very high temperatures, therefore special corrosion resistant coatings may be necessary.