Policy Outlook for UK North Sea and Shale Sectors poles apart

While political parties support oil sector, there are differences of opinion on fracking,says GlobalData

April 30, 2015. By Moulin


Will Scargill, GlobalData’s Senior Analyst covering Upstream Fiscal & Regulatory Regimes, says: “With the UK’s General Election just over a week away, the policy outlooks for the country’s offshore and onshore oil and gas industries are poles apart. Over the past two years, significant incentives have been offered to both onshore and offshore operations. Regulatory barriers have been removed and a new allowance was introduced in 2014 to stimulate onshore unconventional development, while the government has recently introduced changes to mitigate the impact of lower oil prices on North Sea operations. However, while further incentives for the North Sea are likely whatever the outcome of the election, policies towards the unconventional sector will depend on the makeup of the next government.

“Finance Act 2015 included significant improvements to the UK’s upstream fiscal regime, with the headline tax rate reduced from 62% to 50% (or from 81% to 67.5% for older fields) and a new investment allowance introduced. However, while these measures are positive and make the UK’s regime very competitive compared to others in the North Sea, the impact on different fields and companies will vary. The investment allowance will not benefit existing fields unless new capital is committed, while the impact of reduced tax rates will be dampened due to the prevalence of unrecovered tax losses and allowances in the sector.

“Despite the recent changes, further improvements to the fiscal regime for the North Sea appear likely in the medium term. The three main UK-wide parties, as well as the Scottish National Party (SNP), have advocated continued support for the upstream sector in the North Sea. Moreover, one of the functions of the Oil and Gas Authority (OGA), the new North Sea regulator, is to support the Treasury in ensuring that the UK fiscal regime is aligned with the aim of Maximizing Economic Recovery (MER). The MER action plan released by the OGA already moots reform of the fiscal treatment of infrastructure and the introduction of exploration incentives for action early in the next parliament.

“In contrast to the seeming inevitability of further improvements to fiscal terms for the North Sea, the outlook for the UK's shale sector is much more uncertain. The two main parties have significantly different policy stances on the development of shale resources. Furthermore, with neither expected to win a parliamentary majority, the smaller parties’ policies may come into play if a coalition government is formed. In contrast to the Conservative Party’s strong support for shale gas development, the Labour Party is likely to impose a much more stringent regulatory regime, if it allows fracking at all. Labour has imposed a moratorium in Wales and three parties that it could potentially rely on in coalition or minority government, the Green Party, Plaid Cymru and the SNP, are all opposed to the practice.

“If the North Sea and shale sectors are to reach their full potential, supportive policies will be required. In the North Sea, the tax burden must continue to adjust as the basin matures, or MER will not be achieved. The future of the embryonic shale sector will depend on whether it is nurtured by policymakers; if not, the UK’s ‘shale boom’ could be over before it even begins.”

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