The North Sea oil industry received a boost last week when George Osborne announced a tax cut for the industry within the budget.
The Chancellor announced that the supplementary charge on oil and gas companies, levied on top of a 30% per cent corporation tax, would be reduced from 30% to 20%. Additionally, the petroleum revenue tax on older fields has also been reduced, from 50% to 35%.
According to the government’s figures, these changes should increase oil production by about 15% by 2019, encouraging up to £4bn of investment over the next five years.
However, for established North Sea producers like Xcite (LSE: XEL), Premier Oil (LSE: PMO) and EnQuest (LSE: ENQ), these changes won’t do much to boost earnings in the near-term.
Lack of relevance
The changes to the North Sea’s tax regime have attracted plenty of criticism since they were announced. Some analysts have even gone so far as to say that the changes have a total lack of relevance to the industry in its current state.
These criticisms are based on the fact that oil producers like Xcite, Premier and EnQuest are all sitting on rising tax losses. Meaning that the impact on near and medium term cash flows is negligible.
As a result, the figures show that neither Premier nor EnQuest will pay any cash taxes until the end of the decade. Additionally, as Xcite’s main oil project is still in the development stage, the company is accruing significant tax losses that can be offset against production when the Bentley oil field finally comes online.
EnQuest has already confirmed these numbers. Indeed, alongside full-year results released this week, the group’s chief financial officer Jonathan Swinney said that the tax cuts will have no immediate effect on EnQuest unless the oil price recovers. At current prices, EnQuest will not have to pay tax in the region until 2025.
The effect the tax changes will have on Premier is less apparent. Nonetheless, it is believed that the Catcher Area development operated by Premier Oil will see its net present value — profitability over the life of the asset — increase by 5% following these changes to the region’s tax regime.
Xcite is the only company set to report a noticeable benefit from these tax changes. Specifically, figures suggest that the tax bill for new fields could fall to 40%, from the current level, which is closer to 60%.
Additionally, the company will benefit from an investment allowance set at 62.5% of expenditure, which can be set off against profits subject to the supplementary tax rate.
The bottom line
All in all, the changes to the North Sea tax regime should stimulate investment within the region. However, for companies already operating within the basin, these changes won’t have much effect. EnQuest and Premier are still at the mercy of the falling oil price and balance sheet concerns continue to plague these producers.
So, investors are unlikely to see fireworks from these companies any time soon.
