A closer look at George Osborne’s apparent North Sea lifeline reveals a rather inconvenient truth; not very much actually changes.
Analysts estimate the ‘benefit’ to be less than 1% in terms of North Sea asset values.
Explained simplistically, it is because not very much tax was being collected anyway.
The down turn in oil prices has severely impacted tax receipts.
Last year, receipts were reported as being £10mln in negative territory, compared to £2.2bn in the year before.
And the Office of Budget Responsibility - the watchdog set up by Osborne - has forecast negative receipts of up to £1.2bn a year possibly until 2021.
The production revenue tax (PRT) applied to a small number of fields, only those sanctioned for development before 1993.
Corporate tax on the upstream industry remains at 30%, and now the halving of the supplementary charge to 10% from 20% effectively means producers will be taxed at 40%.
But, that only matters if the industry is making money which, while Brent crude meanders between $35 and $40, is not so likely for many fields.
Existing tax leeway such as the ‘investment allowance’ and that accrued tax-losses can be used as ‘grace’ to delay taxation on new fields, mean the changes won’t have much immediate effect for many of the ‘investible’ North Sea oil stocks in London.
London-listed North Sea firms won’t pay tax until 2020 anyway.
The point was succinctly underlined by EnQuest, less than 24 hours after the Osborne’s budget speech.
As it reported financial results on Thursday, the North Sea operator said: “In the current oil price environment, EnQuest does not anticipate paying material UK cash tax in the foreseeable future.”
The oil firm, one of the few developing new fields in the North Sea at the moment, reported annual production of around 36,500 boepd, and with the recent start-up of the Alma/Galia field it expects to produce between 44,000 and 48,000 boepd in 2016.
Next year it is expected to activate the Krakken, a large 50,000 bopd oil field that is expected to cost some $4bn.
As well as Kraken, which is being developed by EnQuest (LON:ENQ) and Cairn, elsewhere substantial investments into other North Sea development projects mean a number of the main London listed North Sea group’s will be paying little or no tax.
Premier Oil (LON:PMO) and Cairn (LON:CNE) are developing the Catcher field, which is due to produce up to a peak rate of up to 50,000 bopd, and is also due online in 2017.
And, Ithaca’s (LON:IAE) Stella field is forecast to start producing later this year, before a ramp up which promises to double the AIM oil firm’s output to around 25,000 boepd.
James Hosie, oil company analyst at Barclays Capital, in a note highlighted that none of the exploration and production companies that he covers are expected to pay any cash taxes until at least 2018 due to the accumulation of tax losses over several years.
Moreover, he says that even if oil prices recover the likes of EnQuest, Ithaca and Premier Oil aren’t forecast to pay cash taxes before 2020.
“We do not believe the tax changes materially alter the outlook for the North Sea, or indeed asset valuations amongst small and mid-cap E&Ps,” Hosie said.
Hosie also highlights that among all the North Sea companies in the investment bank’s coverage there were only four assets where the to-be-abolished PRT applies.
“It is a very challenging environment for small and mid-cap E&Ps operating in the UK North Sea,” the analyst added.
“Asset valuations for individual fields should increase, but when combined with the substantial tax loss pools that smaller North Sea producers have accumulated, the impact on valuation is minimal.
“Quick revisions to our North Sea asset valuations indicate the impact on UK portfolios within our peer group is an uplift of less than 1%.”
Lower tax rates plainly positive, but it’s not a cure
Understandably, as crude prices mean its tin-hat time for the industry, the new tax arrangements were welcomed by industry lobbyist Oil & Gas UK.
Deirdre Michie, Oil & Gas UK chief executive, said the new breaks ‘mark further progress in modernising the tax regime for an increasingly mature basin’.
“We welcome these measures as they will build on the industry’s achievements in improving efficiency in the face of low oil prices, boosting the sector’s competitiveness and helping to restore investor confidence,” she said.
One analyst, meanwhile, pointed to North Sea neighbours Norway, where the approach to oil industry is more tangible supportive - as the state has a stake in industry and directly supports and helps fund exploration.
“The future of the North Sea is hanging on a cliff-edge and the UK Government needs to continue to promote exploration, development and infrastructure to safeguard the industry, security of supply and jobs,” said Ian McLelland, analyst at Edison Investment Research.
Admittedly, it would be disingenuous to completely discard the new tax arrangement.
All other things being equal, plainly the promise of lower tax rates is positive for any business.
For North Sea oil business, however, the badly needed ‘lifeline’ is beyond Westminster’s reach.
Fundamentally, the North Sea industry needs higher oil prices.
Until crude prices recover materially (and that’s assuming they will), fiscally based stimulus will have real world limitations.