Our 2014 series on risk and reward in the UK Continental Shelf (UKCS) outlined the challenges being faced by the UKCS oil and gas industry to remain competitive. A consistent theme emerging from industry stakeholders is that significant fiscal and regulatory reform is required to secure the industry’s long-term future. This post highlights key fiscal and regulatory developments during the first quarter of 2015.

2015 Budget: Welcome fiscal reforms

In the last Budget before the May 2015 general election, the UK Government announced oil and gas sector fiscal reforms, including:

  • A new “investment allowance” to simplify the existing system of offshore field allowances;
  • A reduction in Petroleum Revenue Tax from 50% to 35%; and
  • A reduction in the Supplementary Charge on company profits from 30% to 20%.

Almost simultaneously, the Office for Budget Responsibility published statistics showing that tax receipts from the UKCS were at their lowest in 40 years. The UK Government expects the measures in the Budget will encourage further investment in the UKCS, leading to over £4 billion of additional investment and a 15% increase in oil production by 2019. Oil & Gas UK — the trade association for the offshore oil and gas industry — welcomed the fiscal reforms contained in the Budget, commenting that the Government’s actions were “both sensible and far-sighted”.

Developments in the implementation of the Wood Review recommendations 

As reported in our November 2014 series, the Secretary of State for Energy & Climate Change commissioned Sir Ian Wood to conduct an independent review of offshore oil and gas recovery in the UKCS in June 2013 (the Wood Review). The Wood Review published its final report in February 2014. One of the Wood Review’s recommendations was to establish an arm’s length regulatory body with powers to implement a new strategy for maximising economic recovery from the UKCS (the MER UK Strategy).

In July 2014, as part of its response to the Wood Review, the UK Government announced that it would create the Oil and Gas Authority (the OGA). On 1 April 2015, the OGA was established as an Executive Agency and it will transition into a Government Company by summer 2016.

In March 2015, the Government published its response to the November 2014 Call for Evidence from interested parties concerning the implementation of the Wood Review recommendations. The Government’s response outlines the key regulatory powers of the OGA, which are to include:

  • The right to attend industry meetings as an observer, including meetings between operators within a joint venture and meetings between licensees.
  • Sufficient powers to gather relevant data and information from non-licensee parties captured by the MER UK Strategy.
  • A non-binding role in the resolution of disputes that relate to licence terms or that impacts, or has the potential to impact, on the MER UK Strategy. The OGA will have information-gathering powers and the ability to set timeframes for the provision of information to speed up the resolution process.
  • The power to impose sanctions where parties within the scope of the MER UK Strategy do not comply with the key powers exercised by the OGA, as well as other breaches of the MER UK Strategy and non-compliance with licence conditions. The Government has proposed a statutory limit of £1 million on individual financial penalties, with a reserve power to increase this limit to £5 million, subject to consultation and Parliamentary approval. Although the financial sanctions may be considered relatively modest, the reputational impact upon sanctioned parties is potentially significant.

The Government considers it appropriate for the oil and gas industry to pay the costs of the OGA, consistent with the user pays principle, through a combination of the existing fees and charges regime and a new levy. The Government intends for the costs falling under the levy to initially relate to Offshore Petroleum Licence holders only, and to begin collecting the levy from October 2015. A consultation on the design of the proposed levy is open from 23 March until 20 April 2015.

The Department for Energy & Climate Change is currently preparing a bill for the first session of the new Parliament in summer 2015, which will implement the measures establishing the OGA. However, this timeframe is expressly subject to the will of the new Government and necessary Parliamentary procedures. The outcome of the UK general election on 7 May 2015 could, therefore, have an impact upon the MER UK Strategy and the implementation of the OGA, as well as the UKCS’s broader outlook.