The struggling North Sea oil industry was thrown a lifeline with a package of tax cuts and allowances worth an estimated £1.3bn a year.
The industry welcomed the announcement in what is seen as a crucial budget for its survival, although experts cautioned that the outlook remained tough in the face of low oil and gas prices.
The oil price has tumbled from $115 (£78.50) a barrel in the summer to around $53 now and is expected to stay at around that level for the next few years, after a boom in US shale oil production flooded the market. “It’s clear that the fall in the oil price poses a pressing danger to the future of our North Sea industry – unless we take bold and immediate action,” Mr Osborne said. “While falling oil prices are good news for families, they bring challenges to hundreds of thousands of workers.”
Mr Osborne announced cuts to the “supplementary” rate of tax that oil producers pay in addition to their basic tax, and slashed the higher rate paid by the older fields.
He will also extend the tax relief being offered on investment in some technically difficult oil fields to all new North Sea developments. In addition, the Government will pay for new seismic surveys of under-explored areas of the UK continental shelf to make sure companies are fully aware of the remaining production opportunities. Taken together, the changes will reduce the total tax rate paid by the typical North Sea field from 60 per cent to 50 per cent.
“This announcement lays the foundations for the regeneration of the UK North Sea [oil industry]. These measures send exactly the right signal to investors,” said Malcolm Webb, chief executive of the industry body Oil & Gas UK.
However, experts remain concerned that the tax cuts might not be enough to resuscitate the industry in the long term. Much of the investment planned for the North Sea is not commercially viable at the current oil price.
Sir Ian Wood, the oil industry veteran who carried out an influential report for the Government on the future of North Sea oil, cautioned that the cuts did not go far enough to prevent widespread redundancies.
“There will undoubtedly be job losses as the industry works its way through a very difficult price reduction, but these should be in the 5,000 to 10,000 range, out of the 380,000 current jobs, and significantly less than would have occurred under the previous fiscal regime,” Sir Ian said.
As he made his announcement, Mr Osborne stressed that such support would not have been possible under an independent Scotland.
John Swinney, Scotland’s Deputy First Minister, said Holyrood would have to “study the proposals in detail”.
“The measures are a glaring admission by the Chancellor that his [North Sea] policy has been wrong and that poor stewardship by the UK Government has had a detrimental impact on our oil and gas sector,” he said, referring to a tax increase levied on the industry by Mr Osborne in 2011.
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