Tax by tax, spend by spend

Oil and gas revenues

This Forecast in-depth page has been updated with information available at the time of the March 2023 Economic and fiscal outlook.

UK oil and gas revenues consist of offshore corporation tax (which includes ‘ring fence’ corporation tax and the supplementary charge), petroleum revenue tax and the energy profits levy (EPL). These taxes apply to the profits of companies involved in the production of oil and gas in the UK and on the UK continental shelf (UKCS) (“The North Sea”). In 2023-24 we forecast that oil and gas revenues will raise £10.4 billion. The four streams of revenue are:

  • ‘Ring fence’ corporation tax (RFCT) is calculated in the same way as onshore corporation tax, but with the addition of a ‘ring fence’ and the availability of 100 per cent first-year allowances for virtually all capital expenditure. The ring fence prevents taxable profits from oil and gas extraction in the UK and the UKCS being reduced by losses from other activities. The current rate of tax on ring-fenced profits is 30 per cent.
  • The supplementary charge (SC) is an additional charge on a company’s ring-fenced profits (but with no deduction for finance costs). The current supplementary charge rate is 10 per cent. It was reduced from 20 per cent on 1 January 2016.
  • Petroleum revenue tax (PRT) is a ‘field-based’ tax charged on the profits arising from individual oil and gas fields that were approved for development before 16 March 1993. The rate of PRT was permanently set at zero per cent effective from 1 January 2016 but it has not been abolished so that losses (such as losses arising from decommissioning PRT-liable fields) can be carried back against past PRT payments. PRT was deductible as an expense in computing profits chargeable to RFCT and SC.
  • The energy profits levy (EPL) is an additional surcharge on the profits of oil and gas companies, which came into effect on 26 May 2022. The surcharge was initially set at 25 per cent and due to expire by 31 December 2025. The 2022 Autumn Statement increased the rate to 35 per cent from 1 January 2023 and extended the levy until March 2028.

  Forecast methodology

We commission forecasts of UK oil and gas revenues from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use different models to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are then used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. We also discuss determinants of the forecast with officials from the North Sea Transition Authority (NSTA). This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

Forecasting models

The UK oil and gas forecast uses a micro-simulation model based on production and expenditure data from each individual oil and gas field. This field level data is collected through a survey now carried out by the North Sea Transition Authority. The fully disaggregated data in the model are subject to taxpayer confidentiality, so we only scrutinise the results of the model not the individual field-level inputs. Our forecasts of aggregate levels of oil and gas production and levels of expenditure, along with other determinants – oil and gas prices, the sterling/dollar exchange rate – are fed into the model to produce estimates of tax revenues. Our production and expenditure forecasts are informed by the central projections produced by the North Sea Transition Authority.

Main forecast determinants

The main determinants of our UK oil and gas revenues forecast are those related to the tax base and those that are used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on UK oil and gas revenues.

    • Dollar oil price
    • Sterling/dollar exchange rate
    • Oil and gas production
    • Operating and capital expenditure
    • Decommissioning costs

Main forecast judgements

We need to make several forecast judgements to generate our UK oil and gas revenue forecast. These include:

    • The level of oil and gas production – the tax base (the level of profits generated by the North Sea) is dependent on the quantity of oil and gas extracted. Our assumption on future production levels is informed by the central projections published by the North Sea Transition Authority. Levels of production are driven by a number of factors, including the amount of oil and gas remaining in the UKCS, levels of investment in previous years and the size and duration of extraction outages.
    • Oil and gas prices – we assume that these prices move in line with market expectations over the next three years, and then remain flat in real terms thereafter.
    • Levels of expenditure on the UKCS determine both the future path of production and the value of allowances that can be used to offset against tax liabilities. Our assumption is informed by the central projections produced by the North Sea Transition Authority.

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  Previous forecasts

With oil and gas revenues falling steeply between 2010 and 2016, our forecasts proved repeatedly too high. This reflected lower-than-expected prices and production, higher expenditure by oil and gas firms and reductions in tax rates from 2014 onwards.

Differences between forecasts and outturn were then smaller, with oil and gas revenues remaining at a low level. Previous forecasts for 2022-23 and 2023-24 (apart from our November 2022 forecast which was conditioned on very high gas prices) are all likely to prove pessimistic given much higher oil and gas prices and the increase in the effective tax rate following the introduction of the energy profits levy.

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  Policy measures

Since our first forecast in June 2010, governments have announced a number of policy measures affecting our forecast for oil and gas receipts. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Chapter 3 of the relevant Economic and fiscal outlook (Annex A prior to the March 2023 EFO).

Key oil and gas policy changes announced since 2010 have included:

    • the rate of the supplementary charge was increased from 20 to 32 per cent at Budget 2011. It was then reduced to 30 per cent at Autumn Statement 2014, then to 20 per cent at Budget 2015 and 10 per cent at Budget 2016;
    • the rate of petroleum revenue tax was cut from 50 to 35 per cent at Budget 2015 and was then cut all the way to zero at Budget 2016;
    • investment allowances were introduced at Budget 2015; and
    • the energy profits levy was introduced in May 2022 at a rate of 25 per cent and further raised to 35 per cent from the start of 2023, announced at Autumn Statement 2022. The levy has an end date of 31 March 2028.

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  Ready reckoners

‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our October 2021 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet published on the data section of our website.

The table below shows that:

  • the profits of UK oil and gas companies – and therefore their tax liabilities – are directly affected by changes in the oil price. Receipts will also be affected by the level of production and expenditure, which will themselves be influenced by the oil price, although the simple ready reckoner presented below does not factor in any variation in production or expenditure relative to the baseline.

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Other taxes

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

Oil prices and the economy

An important economic development in the run-up to our March 2015 Economic and fiscal outlook was the sharp drop in oil prices, which had fallen to less than half the $115-a-barrel peak that they had reached in June 2014. In this box we considered the channels along which those lower oil prices were likely to affect the UK economy. (See also Box 2.1 from that EFO for a discussion of the demand- and supply-side factors contributing to lower oil prices.)

Economy categories: Nominal GDP, Oil prices

Fiscal categories: Receipts, Oil and gas revenues

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2015 Economic and Fiscal Outlook, we made adjustments to nominal GDP, inflation and North sea production.

Economy categories: GDP by income, Household disposable income, GDP by expenditure, Property transactions, Household consumption, Inflation, Residential investment, Housing market

Fiscal categories: Public spending, Departmental spending, Oil and gas revenues, Receipts

Cross-cutting categories: Pensions, Financial sector

The impact of frozen or reduced personal tax thresholds

Table 3A: Latest costings of personal tax threshold measures
In our March 2023 Economic and fiscal outlook, we evaluate the impact of the freeze or reduction of various personal tax thresholds since April 2021. This box looked at the receipts generated by these measures as well as the impact on taxpayers: the number of new taxpayers these measures create and the number of taxpayers pulled into higher and additional rates.

Fiscal categories: Receipts, Fuel duty, Income tax, Oil and gas revenues

Cross-cutting categories: Fiscal drag and price uprating

The evolution of North Sea oil and gas receipts

Chart 4C: Oil and gas receipts and commercial revenues since 1970
In our March 2023 Economic and fiscal outlook, we forecast that North Sea oil and gas receipts would rise sharply in the near-term to close to their all-time high in cash terms. This box explored the evolution of receipts since the discovery of North Sea oil and gas.

Fiscal categories: Oil and gas revenues

The oil price and the fiscal forecast

The oil price and the fiscal forecast
The world price of oil increased sharply in 2010, reflecting rising world demand and unrest in the Middle East and North Africa. This box explored the impact this had on our public finances forecast at the time, from higher North Sea oil and gas revenues to the second round effects stemming from higher inflation.

Economy categories: Oil prices

Fiscal categories: Fuel duty, Oil and gas revenues, Receipts

The rise and fall of oil and gas revenues

The rise and fall of oil and gas revenues
North sea oil and gas revenues have historically been volatile. This box showed how movements in revenues between the peaks and troughs since the early 1970s can be explained by drivers of taxable profits - the volume and price of production (which together provide a proxy for sales), the implied profit margin on those sales and the effective tax rate paid on those profits.

Fiscal categories: Receipts, Oil and gas revenues

Use of Whole of Government Accounts

The Whole of Government Accounts (WGA) contains information on future fiscal liabilities that are relevant for our forecast. This box explained how we ensured that those future liabilities reported in the WGA were fully reflected in our forecasts, where those liabilities were expected to affect the public finances.

Fiscal categories: Public service pension payments, Whole of Government Accounts and National accounts, Public spending, Receipts, Oil and gas revenues

Cross-cutting categories: Pensions