Oil and gas companies unconvinced by promises on taxation

22 November 2013

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Majority expect increases on tax and regulation in the event of independence

22 November 2013: Senior oil and gas executives with operations in the North Sea expect the levels of taxation levied on the industry to increase should Scotland become an independent country, according to EY.

More than three quarters (79%) of the near 140 industry leaders and decision makers polled as part of the professional services firm’s latest Grasping the thistle report, which has been produced in association with Aberdeen & Grampian Chamber of Commerce, anticipate a hike in the tax take from the UK Continental Shelf (UKCS) in the event of a ‘yes’ vote.

Scottish Government must engage more with industry

Colin Pearson, a tax partner at EY Aberdeen, said: “The current Scottish Government has consistently stated that taxes would be reduced generally or in some targeted fashion following a ‘yes’ vote to promote Scotland’s economic prosperity. However, the results of our survey appear to suggest that oil and gas executives presently do not believe that this would apply to them.

“The surprise tax rise introduced in the 2011 Budget may have rocked the industry, but subsequent announcements, including the creation of Decommissioning Relief Deeds, have redressed that, resulting in a relatively stable relationship and mutual understanding between the sector and HM Treasury.

“Clearly, exposing the regime to any further seismic shocks would damage trust between those parties, but the onus is on the Scottish Government to do more to engage with the oil and gas community, starting with the publication of its blueprint for independence next week.”

Views cannot be formed without more information

James Bream, research and policy director at Aberdeen & Grampian Chamber of Commerce, added: “This study confirms the findings of a paper we published earlier this year stating that taxation was one of the ‘big ticket’ items influencing the debate.

“There are still 10 months until the referendum and therefore sufficient time for both sides of the discussion to make their case. All businesses, including those operating within the oil and gas sector, want to be presented with compelling narratives, no matter the angle the narrator is coming from.

“More than half of the respondents to this latest survey still say that more information is required in order for them to form a view and we will continue to press for answers from each campaign as we seek clarity on behalf of our members.”

Skills shortage the most compelling concern

More than half of those surveyed (62%) believe independence will also lead to greater regulation in the sector. This was welcomed by one respondent, who said: “Currently, I believe that the UKCS does not receive the attention that it deserves. In the event of a ‘yes’ vote I believe that the UKCS would be better recognised and more focus would be applied to issues within the industry.”

Although another respondent suggested: “The main issue is the uncertainty a ‘yes’ vote would introduce until a new Scottish government was in place and all the regulations were updated.”

That said, nearly two thirds (64%) of respondents said that the referendum debate is having no impact on North Sea investment plans with the supply of skilled employees emerging as their most pressing area of concern for oil and gas executives, followed by cost base.

Colin Pearson added: “It appears that rather than worrying about the implications of the independence vote the oil and gas industry is simply focussing on the task at hand – extracting the North Sea’s remaining reserves, running their businesses and generating wealth and employment for the Scottish and UK economies.”

Support for Sovereign Wealth Fund, but not solely for Scotland

A central theme of the debate over independence has been the creation of a Sovereign Wealth Fund with the aim of spreading the wealth generated by the oil and gas industry across future generations.

More than half of those polled (61%) supported the creation of such a fund in various forms, but the biggest group in favour – 25% of all respondents – think that a Sovereign Wealth Fund should be created for the UK as a whole.

Despite this, overall favourability for the fund declined dramatically once potential sources of capital funding were discussed. More than a third of respondents (35%) said they would reject the idea if it meant higher taxes. One respondent said: “I may be supportive of the fund [if it came] with a guarantee that it did not involve any tax increases and was [funded] from surplus revenue.”

Another added: “I would support a Sovereign Wealth Fund if it meant a reduction in public spending, but not an increase in taxation.”

While another said: “I would like to see not just a Sovereign Wealth Fund, but also see government consider whether the UK and/or Scotland should create a state-owned oil operating company.”

Colin Pearson concluded: “The issue of a Sovereign Wealth Fund appears to have struck a chord with oil and gas industry leaders and there seems to be strong support for this proposition. But this does not obviously translate into support for independence as there is a block of support for a UK fund. The UK Government may wish bear this in mind in the coming months while it considers its approach to the nation’s political and fiscal future.”