Wood Mackenzie analysis highlights critical challenges in developing more predictable tax policy

(WO) - After a history of ad hoc changes, the UK government must implement a more predictable tax regime that provides greater long-term stability to the North Sea oil and gas sector, as soon as possible, according to new analysis by Wood Mackenzie.

The UK government has acknowledged that oil and gas production in the North Sea will be required for “decades to come”. But recent and proposed modifications to the Energy Profits Levy (EPL) – currently set to end in 2030 – have created “unparalleled sector uncertainty and consternation”, the report states.

A system that is equitable to both government and industry will be challenging to design, but is essential to ensuring clarity before the impact on investment in this very mature sector becomes irreversible.

Details of the planned changes to the EPL will be confirmed in the Budget on 30 October. That announcement may also specify the timeline for establishing the successor to the EPL.

Wood Mackenzie notes that for a predictable fiscal system to be introduced, government and industry engagement must address several challenges:

• Defining a price ‘shock’ and its duration;
• Determining the appropriate government share to apply during a price shock and how, or if, it should vary, including a simple on/off switch, stepped rate increases, like the UK’s personal income tax bands, or a sliding scale;
• Deciding whether to target only excess income or applying a measure to a company’s entire taxable income, as is current practice;
• Creating a system to fairly tax companies with both oil and gas production when the prices of these commodities can fluctuate in opposite directions;
• Simplifying the current tax system.

It adds that the solutions must be: “predictable, transparent, simple to administer and self-adjusting during periods of price volatility to minimise the need for further government intervention.”

Graham Kellas, Senior Vice President, Global Fiscal Research at Wood Mackenzie, said: “North Sea oil and gas operators are trying to make long-term financial decisions beyond 2030, but the current fiscal regime does not allow for such clarity.

“Price responsiveness, predictability, fairness, simplicity and transparency must all be considered to ensure the correct outcome is reached at what is a crucial juncture for the sector. This will be a difficult conversation, with the mechanisms required for an improved system complicated by having to negotiate the myriad of economic outcomes and investor types. But this must be tackled, and a solution found, quickly.

“Achieving consensus on the issues will be highly challenging, not just between industry and government, but between the companies themselves. And there are potential conflicts between the objectives, such as simplicity versus fairness and responsiveness versus transparency.

“The consultation will be far from easy, but there are some shared objectives and where there’s a will, there’s a way.”