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Tax Revenues Decline as Oil and Gas Output Drops

22 Aug 2012

Plummeting oil and gas outputs from the North Sea have caused a drastic decline in the Government’s finances. This is an indication of what will probably continue to happen as oil begins to run dry. 

The Office for Budget Responsibility had recently indicated a reduction in oil and gas revenues, due to low tax receipts in July. This is normally one of the main months for receipts and when oil and gas companies pay the first of three instalments on their annual profits. The sector which is generally responsible for contributing up to a quarter of the UK’s corporation tax is in decline.

Chancellor of the Exchequer, George Osborne, commented last year that it was fair for oil explorers to bear a greater tax burden as part of his austerity measures. He put a £2 billion tax increase on producers. In the new budget he claimed that the industry responded by dropping production by 18%, which in turn led to a steep decrease in tax revenues totalling almost £2.3 billion. With the addition of many fields reaching the end of their working life, this has resulted in a fall in output.

Malcolm Webb, Chief Executive of Oil & Gas UK said: “The dramatic fall in oil and gas production last year and consequent lower than anticipated tax revenue is very concerning. It can be attributed in no small part to the history of instability in UK oil and gas taxation resulting in lower investment in earlier years meaning very few new fields started producing last year. In addition to this, several unexpected stoppages were required to maintain the integrity of the existing fields.”

“All of this serves to underline the importance of unlocking new investment in projects in and around those existing fields. Unfortunately a large number of those projects are currently not able to proceed because the tax take – it is 81 per cent on the older fields – is simply too high. So right now, we urgently need a brown-field allowance of the type mentioned in this year’s Budget to allow further investment to flow. The industry and the Government have been in close and constructive discussions on this for some months and we are currently waiting on a decision from Treasury.”