North Sea oil tax haul gushes to £1bn as crude prices recover
Higher prices, increased production and lower costs drive revenue turnround
North Sea oil will bring in about £1bn in tax this financial year, a startling reverse from the previous 12 months when it failed to generate any revenues for the Treasury.
A rise in the price of Brent crude, the international benchmark, coupled with higher production and lower costs are the main drivers behind the turnround.
New projections from Oil & Gas UK, the industry trade body, show that it is on course to deliver about £1bn for the fiscal year 2017-18.
“We’ve seen an uptick in production and an increase in the oil price. That, combined with a lower cost base will boost the industry’s contribution,” said Adam Davey, market intelligence manager at the association.
“Today, we can expect to make a contribution in the hundreds of millions of pounds, if not £1bn, for the tax year 2017-18,” he added.
The industry already generated just over £800m of revenues (net of tax rebates paid on decommissioning and other expenses) in the first three quarters of the year to the end of December, according to figures from HM Revenue & Customs. A £1bn boost to the Treasury will be good news for the Philip Hammond, the chancellor, who will give an update on the government’s budget in the spring statement in mid-March. HMRC declined to comment.
The positive tax contribution from oil and gas production is the latest sign of a bounceback by the industry, buoyed by a Brent crude price that in January broke through the $71-a-barrel mark for the first time since 2015. Across the industry costs have come down since the crash as companies have focused on operational efficiencies. Development costs of new projects are averaging half of those approved in 2013.
Production in the North Sea is also bucking the recent decline. Wood Mackenzie, the energy consultancy, expects it to average 1.9 million barrels of oil equivalent a day in 2018, its highest since 2010. BP last week announced two new discoveries in the North Sea and reiterated its ambition to double production from the region to 200,000 barrels a day by 2020.
“Future tax receipts will critically depend on oil price, the pace at which new developments come on stream and the industry’s ability to manage operating costs on the large, declining fields,” said Graham Kellas, of the consultancy’s global fiscal research team. “So, while North Sea profitability is currently very much improved, operators continue to face significant challenges going forward.”
The expected £1bn contribution comes after the government’s revenues from the industry last year dropped to their lowest level since records began in the late 1960s.
Revenues fell to minus £316m in the financial year 2016-17, according to figures from HMRC, underlining the damage wrought by the downturn. It was the first time that tax rebates issued to companies as relief on the costs of decommissioning and other expenditure outweighed the tax paid. The industry generated £151m the year before, in 2015-16.
The positive forecasts are a still big drop from previous years, notably from a chunky contribution of £10.9bn in 2011-12. The Office for Budget Responsibility forecast last year that the oil and gas industry would make a net tax contribution of £700m in 2017-18. At the time it said it expected that number to drop to £500m in 2018-19 and £400m in 2020-21.