UK tax reduction might be of little help to the E&P industry in a low oil price environment

March 18, 2016

By Veronika Akulinitseva, Analyst, Rystad Energy

Amid prevailing low oil prices, the UK government announced tax cuts for energy companies, in order to support the oil and gas industry in a difficult macro environment. The proposed tax maneuver essentially reduces the Supplementary Charge paid on company profits from 20% down to 10%, as well as abolishes the Petroleum Revenue Tax still paid on some producing fields; both these measures are effective from January 01, 2016. Only last year the UK government reduced the Supplementary Charge from 32% to 20%.

Rystad Energy’s analysis shows that while the Supplementary Charge cut would benefit companies under a high oil price environment, the effect could in fact be the opposite under a low oil price scenario. Essentially, only companies with the most competitive portfolios would benefit from the tax cut, while operators with more mature portfolios could be hurt by the current tax reduction and could see the value of their UK assets diminish.

With the current oil price hovering around $40 per barrel, most of the companies operating on the UKCS are not in a tax position this year. The graph below depicts 2016 net income from UK portfolios of the top five companies with headquarters in the UK. All of them already show a negative net income this year, and further reduction in taxes will not help improve their current Free Cash Flow. 

 

Figure 1: 2016 net income of five key UK players – MUSD (Source: Rystad Energy UCube)

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Article Contacts

Veronika Akulinitseva, Analyst
Phone: +47 24 00 42 00
veronika@rystadenergy.com

Julia Weiss, VP Marketing
Phone: +47 48 29 87 61
julia.weiss@rystadenergy.com

About Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.

Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.