Economic Report 2018

ECONOMIC REPORT 2018

Over the last 50 years, substantial production tax revenues of £350 billion (in 2017 money) have been generated from UKCS production. These have fluctuated over time as tax rates and profitability have varied. The production tax regime has been designed to closely reflect the cash flow of the basin and, as such, North Sea tax receipts have varied significantly in recent years as a result of the downturn within the industry. They fell from a £2.1 billion net- positive contribution to HM Treasury in fiscal year 2014-15, to an outflow of £300 million two years later, reflecting much lower oil and gas prices and reduced revenues. The ability to depreciate at will following strong investment in preceding years further depressed tax receipts over the period. In contrast, production tax payments have again turned positive, rising to almost £1.2 billion in the most recent tax year 2017-18 as cash flows have begun to recover. Taking the average oil price for the first half of 2018 and the likely forward curve into account, it is anticipated that production taxes will continue to grow and could potentially rise to in excess of £2 billion in tax year 2018-19, although the Office for Budget Responsibility (OBR) is currently more cautious in its assumptions at this time. Creating a Fiscal Regime for a Mature Basin The fiscal policy applied to the industry has varied significantly over the years under successive governments. However, it is only in more recent years that HM Treasury has recognised the maturity of the basin and the need to manage real perceptions of fiscal risk and the lack of fiscal competitiveness, which have increasingly become barriers to investment. Building on the recommendations of the Wood Review , which resulted in the creation of the OGA, HM Treasury consulted widely on the appropriate fiscal regime for a mature basin, leading to the publication of the Driving Investment Strategy in 2014. The strategy concluded that a fresh approach was needed to increase investment and Maximise Economic Recovery in a mature basin. It was recognised that the regime needed to reward investment in the UKCS at all stages of the industry life cycle and that, to maximise investment, the overall tax burden facing the industry needed to be reduced. These guiding principles should ensure a more competitive, simple and predictable fiscal regime. Since its launch, the Driving Investment Strategy has provided certainty by offering a predictable fiscal environment upon which to base long-term investment decisions. The basin has also seen tax rates fall, helping to ensure that post-tax rewards on the UKCS remain competitive with other investment opportunities around the world. The combination of a stable and competitive fiscal regime, offering certainty to the investor, coupled with the improvements to the regulatory regime, have been fundamental to attracting the new wave of investors to the UKCS in recent years (see section 5.6). The challenge now is to keep attracting investors to the UKCS as the industry continues to recover from the recent downturn. Investments are made over a long-term horizon, therefore any inappropriate changes made in the short term would have severe and enduring consequences. Whilst profitability has returned to many upstream companies, the supply chain is still struggling, and new activity must be nurtured with care.

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