The Chancellor has announced the 2023 Autumn Statement which included the introduction of an oil and gas fiscal regime

The Chancellor has announced the 2023 Autumn Statement which included the introduction of an oil and gas fiscal regime covering the Government's short-, medium- and long-term commitments to support investment in the UK's oil and gas sector in response to the Oil and Gas Fiscal Review Outcome and summary of responses Call for Evidence. The new regime, to be introduced in a future Finance Bill, will include the principles for the tax treatment of oil and gas price shocks and provide tax relief for payments into decommissioning funds for Carbon Capture Usage and Storage.

Energy Profits Levy (EPL) Energy Security Investment Mechanism (ESIM)

The Government confirmed that the end date for the EPL remains 31 March 2028 but that the levy will permanently be disapplied earlier if average oil and gas prices both meet or fall below the ESIM price thresholds for 2 consecutive quarters. (The Government used a 20-year historic average to the end of 2022 to calculate the ESIM price thresholds, which are set at $71.40 per barrel of oil and £0.54 per therm of gas).

Going forward, the EPL ESIM will be monitored monthly to check current commodity prices against the ESIM price thresholds.

The ESIM price thresholds will be adjusted annually in line with CPI from April 2024.

It has been highlighted to Government by industry that the EPL makes the UKCS uncompetitive globally so given the minimal impact of the changes announced, it's doubtful that they will be material enough to change that.

Principles for the tax treatment of oil and gas price shocks

Respondents to the Call for Evidence highlighted that clarity and predictability ahead of changes being implemented by the Government can allow better investment planning. The Government will provide details on how price shocks will be defined in advance of the Energy Profits Levy ending and before a new mechanism is considered for introduction.

The Government announced that a future mechanism would be targeted at the unexpected outcomes arising from a price shock to limit the impact on investment decisions.

The Government has stated that it is their aim to ensure the tax system remains stable to support investment in the industry and that it will hold regular engagement with stakeholders to understand the latest and evolving context for oil and gas investment, including a Ministerially chaired fiscal forum twice a year. We expect that the increased engagement will be welcomed by industry. However, most upstream producers who responded to the Call for Evidence did not support a pre-set mechanism for tax to respond to price shocks.

Decarbonisation

The Annual Statement has confirmed that to support investment in low carbon technologies, the Government will remove the tax barriers to oil and gas assets being repurposed for use in CCUS projects. We await further information on the proposed future Finance Bill which will introduce tax relief for payments made by oil and gas companies into decommissioning funds.

These payments are intended to cover the company’s share of the decommissioning liability of the repurposed asset and be due tax relief of equal value to the relief available for ordinary decommissioning activities. In practice, this means that after making a payment into a decommissioning fund, companies will be able to claim Change of Use Relief (CoUR), freeing them from any future decommissioning obligations regarding the repurposed asset.

The Annual Statement also confirms that the introduction of legislation will also remove receipts received from the sale of oil and gas assets which are repurposed for use in CCUS from the EPL, ensuring EPL does not disincentivise companies supporting the transition.

The Decarbonisation Investment Allowance (DIA) will remain in place for the duration of the EPL to support the industry to decarbonise. The current relief rate sits at £1.0925/£. However, once the EPL ends, whilst the Decarbonisation Investment Allowance will also end, the Government confirmed that it will continue to offer tax relief of £0.4625/£ on investment, including decarbonisation.

Finally, the Government has stated that it will continue to keep the role of the oil and gas fiscal regime under review as the transition progresses.