Analysis: North Sea industry cost UK taxpayers £396m in 2016

The North Sea oil and gas sector became a net drain on the UK’s public finances for the first time in 2016, Carbon Brief analysis shows.

In total, the sector received £396m in 2016, net of tax payments. This is the first year that the North Sea industry has cost the exchequer more than it has contributed.

Carbon Brief analysis of a second set of figures, published last week, shows oil majors BP, ExxonMobil and Shell were the largest recipients of taxpayer funds during 2014 and 2015. Each has received hundreds of millions of pounds to cover the costs of decommissioning old oil and gas fields.

North Sea legacy

Since the government passed the Continental Shelf Act in 1964, billions of barrels of oil and gas have been extracted from reserves under the North Sea.

Now, some of the largest fields are coming to the end of their life. The rigs, pipelines and other infrastructure built to exploit them must be safely decommissioned. Cleaning up this legacy will cost an estimated £47bn out to 2050, according to the UK’s Oil and Gas Authority (OGA).

Companies can reclaim tax paid in previous years, in order to cover this spending. Oil prices are still far below recent highs and the government has introduced generous tax breaks, worth £2.3bn, designed to encourage new investment in the North Sea.

Meanwhile, estimates of the total cost of decommissioning are highly uncertain, with the OGA giving a range of plus or minus 40% on its £47bn figure. One 2016 study said taxpayers could face a £75bn bill. Other studies have speculated that the costs could wipe out all future North Sea tax revenues, potentially damaging the economic case for Scottish independence. As the Financial Times noted in January, the North Sea industry “risks becoming a net drain on UK resources as it enters its sunset years”.

Having reached highs of £12bn revenue in some years, this moment has already arrived, with the North Sea for the first time becoming a net drain on the public finances and costing £0.4bn (£396m) in calendar year 2016. Future revenues are uncertain, see below. Either way, the sector is no longer the cash cow chancellors have come to expect over the past several decades.

It’s worth adding that, in total, the sector has contributed in the region of £190bn in tax revenues since the 1960s (see chart, below). Note that this figure has not been adjusted for inflation. After accounting for inflation, estimated revenues are even larger; a Financial Times article puts them at £330bn.

Total tax received from the North Sea oil and gas sector 1968-2017, not adjusted for inflation. Includes petroleum revenue tax, ringfence corporation tax, supplementary charge, royalty and gas levy. Figure for 2016-17 covers 11 months to February 2017. Source: HM Revenue and Customs table 11.11 and monthly tax summary. Chart by Carbon Brief, using Highcharts.

North Sea firms received a net tax payment of £24m in the 2015/16 tax year. In the current tax year to date, they received £420m, suggesting the net tax position is getting worse.

Biggest winners

The largest recipients of taxpayer funds are revealed in separate government figures, published last week. The Extractive Industries Transparency Initiative, now in its second year, details payments between government and the oil, gas and mining sectors in the UK.

The latest figures, covering calendar year 2015, show a broadly similar pattern to last year’s data. In total, across the two years, the top net recipients of public cash are BP, ExxonMobil and Shell (see chart, below).

Payments from UK taxpayers to oil and gas firms in 2014 and 2015. The top five net recipients are shown. Source: Extractive Industries Transparency Initiative reports. Chart by Carbon Brief using Highcharts.

The top five recipients (BP, Shell, ExxonMobil, Talisman Sinopec and Hess) were paid a net total of more than £1.1bn across 2014 and 2015, Carbon Brief analysis shows.

Tax forecast

In terms of future tax receipts, the outlook for the oil and gas sector appears as uncertain as next year’s oil price – or the total cost of decommissioning.

For a number of years, the Office for Budget Responsibility (OBR) continually downgraded its forecasts for the North Sea tax take. This reflected a combination of new tax reliefs introduced by former chancellor George Osborne, and the falling oil price.

By March 2016, the OBR was forecasting that the oil and gas sector would be receiving a net payment of £1bn per year from UK taxpayers, for five years from 2016-17.

@CarbonBrief @DrSimEvans My analysis shows OBR are forecasting negative North Sea tax receipts overall (new chart) pic.twitter.com/l1IUjtm4HU

— Richard Howard (@RichardHowardPX) April 21, 2016

Later in 2016, the OBR started to revise upwards its forecasts for UK oil and gas revenues, as oil prices recovered from lows of $30 per barrel. The most recent March 2017 estimates show the sector contributing a net £4.5bn over five years, instead of the £5bn cost seen in March 2016.

Note that the latest OBR forecast is one third lower than its November 2016 estimate. This is because of a change in methodology regarding how much capital expenditure could be offset against future taxes, as well as the fall in the pound.