There was a time when it looked like George Osborne, the Chancellor of the Exchequer, simply could not make up his mind how he wished to approach North Sea oil and gas.
In 2011 he launched a massive windfall tax on the industry, only to reverse the policy and offer tax breaks to encourage further investment. It made for uncertain times for a sector that is vital to the good health of both the Scottish and UK economies.
Now, more a year after offering tax relief on the cost of decommissioning, the UK Government looks likely to end the uncertainty this week by indicating it has decided tax breaks are the way to go. In the next few days, either Mr Osborne or his colleague Danny Alexander, the Chief Secretary to the Treasury, is expected to announce that more tax breaks are coming the way of oil and gas, probably on the costs of exploration.
Such a policy will cause concern among environmentalists, which is understandable. Extracting more oil and gas from the North Sea remains problematic for the environment and, in the longer term, Scotland has to develop a viable policy for moving away from fossil fuels by investing in green energy technologies.
However, oil and gas remain vital to the Scottish economy. There are more than 200,000 people engaged in the North Sea industries and one third of all industrial investment in the UK goes into the sector. And the prospects remain good: the North Sea is thought to have about 40 per cent of its reserves as yet unexploited.
Walking away from those reserves would mean Britain would be forced to increase imports, reducing our fuel security. But extracting the reserves comes with its own problems: reaching the pockets of oil and gas that remain has become harder and more expensive, and one of the reasons North Sea oil production has been declining in recent years has been the cost of exploiting harder-to-reach deposits.
This is where tax breaks can help. Indeed, when Aberdeen-based EnQuest announced last year that it planned to develop the Kraken oil field east of the Shetland Islands, many in the industry said it was tax breaks that had made it possible. Of course, no industry is ever likely to complain about tax cuts, but we know increasing the tax on the industry can damage investment: when the former chancellor Alistair Darling doubled the supplementary charge on oil and gas producers to 20 per cent, investment declined by one quarter.
The potential returns of encouraging more investment through tax breaks are also good: figures suggest that every £1 invested in the industry ultimately yields £1 of revenue and the industry also pays a hefty amount of tax: in 2012-13, it paid more than 15 per cent of all the corporate taxes paid in the UK. The challenge for Mr Osborne is to encourage more investment and growth as part of a bigger strategy of developing and supporting a safe, efficient and responsible industry that still has great prospects. Tax breaks on further exploration can play a part in that strategy.
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