Leading economist backs North Sea tax breaks

By Paul Hyland

A leading UK energy economist has backed calls for tax reform for North Sea oil exploration and extraction.

Professor Alexander Kemp, Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance at the University of Aberdeen, has backed a report by Aberdeen and Grampian Chamber of Commerce (AGCC) calling for tax cuts for the industry.

Professor Kemp said tax cuts were important to combat declining efficiency in the North Sea.

“The North Sea oil and gas industry is a maturing one and the recent performance has been one of declining production, declining production efficiency and declining exploration. We now have on top of all that, a substantial fall in the oil price which makes some future projects not yet sanctioned, non-commercial.

“The tax system needs to adjust to the new operating environment of much lower oil prices and high cost per barrel which is currently the position. So in the North Sea, for very old fields, we have a marginal rate of tax going up to 81 percent and for newer fields at 62 percent and certainly I go along with the idea that tax reform is needed in the present condition of the industry.”

The AGCC reported in their recent survey that 62 percent of oil and gas firms believed fiscal reform should be the government’s top priority.

The AGCC survey showed confidence had hit a six year low in the industry’s prospects among firms. They are calling for changes in fiscal policy for the industry in Chancellor George Osborne’s Autumn Statement on December 3rd.

However, environmental groups have argued it would be a mistake to give oil and gas firms a tax break.

WWF Scotland director Lang Banks said: “The science is clear. To reduce the risk of dangerous global climate change, the vast majority of known fossil fuel reserves need to be left in the ground and not exploited. Therefore the last thing we need to see is even more tax breaks or subsidies for new North Sea oil drilling.

“We instead need to see an energy transition that enables us to harness the engineering skills currently deployed in the oil and gas industry and apply them to supporting a range of cleaner forms of energy production.”

Mary Church, Head of Campaigns at Friends of the Earth Scotland said: “If the UK Government is serious about tackling climate change it must refuse this request for yet more subsidies for these big corporations.

“Climate science tells us we need to leave 80 percent of known fossil fuels reserves in the ground so incentivising their further extraction is dangerous and shortsighted.

“We should instead be investing in clean, locally-owned renewables rather than propping up dirty energy companies.”

However, Professor Kemp argued: “Well that’s all fine, to put our effort into renewable energy and reducing the CO2 emissions but we should remember that you can’t just stop using oil and gas overnight, it has to be a gradual process, otherwise there would be tremendous disruption to the economy.

“The tax system in the North Sea is much tougher than it is for other industries. In other industries the tax rate is only 21% and will be 20% next year, so they get much more favourable treatment.

“If we just cut down on our production, then I’m afraid that what would happen would be that we would just import more from countries which are not taking many steps to reduce their emissions. It’s called the CO2 leakage point.

“If the production in the North Sea went down further, then we are not going to use less oil, we are just going to import it from countries from the Middle East and Africa where they are not doing anything to reduce emissions.”

 

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