Letter to the Chairman from Maersk Oil
North Sea UK Limited
EFFECT OF
TAX INCREASES
IN THE
OIL INDUSTRY
I am most grateful to you and your fellow members
of the Scottish Affairs Committee for taking the time to meet
with representatives of the UK Oil and Gas industry under the
auspices of the SCDI dinner. It was a good opportunity for us
to meet directly with politicians, in a convivial setting, and
explain our issues and concerns for the longer term survival and
success of the UK oil and gas industry. As I mentioned to you
Maersk Oil has some very specific issues arising from the recent
increase in SCT from 10% to 20%, impacting our recent $3 billion
investment in the UK, which has potentially damaging repercussions
for the future. I hope the attached document will provide more
detailed insight into these issues and provide scope for future
dialogue.
Maersk Oil in the UK
Maersk Olie og Gas ("Maersk Oil")
is a fully owned subsidiary of A.P. Moller—Maersk ("APMM").
Maersk Oil undertakes oil and gas exploration and production operations
worldwide, directly through subsidiary companies. Maersk Oil and
its activities are summarised in the attached note "Maersk
Oil" (Attachment 1).
The APMM group of companies have its main activities
within oil and gas exploration and production, transportation
and shipping. Shipping activities in the UK (containers, bulk
and logistics) commenced more than 50 years ago, and today the
group ranks first or second among UK ship-owners with 42 UK flagged
vessels and more to come. The group today employs a staff more
than 10,000 in the UK. The activities are summarised in the attached
note "A.P.Moller—Maersk in the UK" (Attachment
2).
Maersk Oil has been active in the UK since 1992
with oil and gas exploration activities, and no production income
until 2005. Recently, Maersk Oil embarked on a new strategy
for significant expansion in the UK, with focus on picking up
where other oil companies, frequently the oil majors, have given
up or moved on. For this purpose, Maersk Oil draws on its experience
with difficult and marginal oil and gas fields in Denmark and
elsewhere, supported by a cost-conscious organisation.
Acquisition of Kerr-McGee's UK Activities
In August 2005, Maersk Oil agreed with US independent
Kerr-McGee to acquire the majority of its oil and gas activities
in the UK. The purchase price (enterprise value) was USD 2.95
billion (GBP 1.75 billion). The agreement became final in November
2005.
The acquisition comprises 10 producing oil and
gas fields, three fields under development, a portfolio of exploration
licences and a staff of more than 500 in total, mainly based in
Aberdeen and at the offshore production sites. The oil and gas
fields acquired are all small or marginal in international context.
Maersk Oil acquired Kerr-McGee's interests and
activities with the intention of leveraging the considerable expertise
obtained from more than 40 years of oil and gas activity and 30
years of specific offshore production experience in Denmark. With
the proximity of operations and scope for direct application of
management and expert resources, Maersk Oil is well positioned
to optimise field development, including near-field appraisal
and exploration, and production operations in the UK, aimed at
improving production rates and field life for the benefit of ultimate
recovery. At the same time, Maersk Oil has the necessary financial
resources.
Maersk Oil's expected future investment in the
UK is significant. A total investment of USD 1.2 billion (GBP
0.72 billion) in field developments during the period 2006-11
was planned at the time of completion of the acquisition in November
2005, in addition to operational expenditures.
Consequences of the Announced Taxation Increase
Announced only weeks after the completion of
the acquisition by Maersk Oil, the new tax increase will deplete
significant value from any recent purchaser's investment in oil
and gas in the UK. In Maersk Oil's case, approximately USD 0.42
billion (GBP 0.25 billion) or 15% has been depleted from the value
of the USD 2.95 billion (GBP 1.75 billion) investment.
In its assessment of the value of the assets,
Maersk Oil has relied upon projected after-tax cash flows, applying
existing tax rates. Maersk Oil has not previously had oil and
gas production and income in the UK and has thus not enjoyed any
benefit from the recent high oil and gas prices in relation to
the interests acquired.
It is fair to add that Maersk Oil, with the
announced tax increase, may now have to reconsider new investment
in field developments and exploration, pending further detailed
economic analysis.
The UK Challenge
The further identification and development of
oil and gas reserves on the UK Continental Shelf—with value
creation for companies and society as the result-require investors
with substantial financial, technological and managerial resources.
With the maturity of the known UK oil and gas resources, new concepts
and solutions will be required to counter the natural production
decline in a commercially viable manner.
Maersk Oil is among the companies that are willing
and capable of investing in mature fields and the development
of small and marginal fields. Such investments are made possible
by the application of state-of-the-art drilling and well completion
technology, combined with simple surface facilities and high operational
efficiency.
It is imperative for the future of mature oil
province like the UK Continental Shelf to be able to attract and
retain the more specialised operating companies when the oil majors
move on. Maersk Oil is such a company.
Jobs
Maersk Oil's recent acquisition involves 500
jobs, mainly in Aberdeen and at offshore production sites. Maersk
Oil's intention has all along been to grow the business, in the
UK.
For this ambition to be practicable, the fiscal
regime is obviously of great importance. The announced tax increase
has created a great deal of anxiety also among the staff in Aberdeen
where Maersk Oil continues to be asked about the effect on future
activities and employment.
CONCLUSION
The recent tax increase is inequitable and punitive
to recent investors who have paid full value to take ownership
of UKCS assets and despite representations to Treasury no transitional
arrangements to mitigate the impact are forthcoming.
The specific value impact of this tax increase
and the threat of further change to the fiscal regime have adverse
effect on the confidence of Maersk Oil as to the relative merits
of the UKCS as a region for future investment.
The UK Government/HM Treasury needs to nurture
investment by companies such as Maersk Oil to enable optimal recovery
of oil and gas resources from the UKCS to benefit from the resulting
economic activity and tax take.
If I can provide any further background information
please do not hesitate to contact my office on 01224 242414, or
by email to mengell-jensen@maerskoil.co.uk.
Michael Engell-Jensen
Maersk Oil North Sea UK Limited
20 June 2006
Attachment 1
MAERSK OIL
Background
Maersk Olie og Gas AS ("Maersk Oil")
is a company owned by A.P. Moller—Maersk A/S, and is part
of the A.P. Moller—Maersk Group. Maersk Oil was established
in 1962.
Business activities
Maersk Oil is a Top-20 international oil and
gas company operating an average oil production of more than 550,000
barrels per day and sales gas production of some 900 million cubic
feet per day. The company has an equity share production of some
500,000 barrels of oil equivalent per day from activities in Denmark,
Qatar, Algeria, United Kingdom and Kazakhstan.
Exploration activities are ongoing in the North
Sea (Denmark, United Kingdom, Norway and Germany), North Africa
(Algeria and Morocco), West Africa (Angola), the Middle East (Qatar
and Oman), South America (Brazil, Colombia and Surinam) and Central
Asia (Turkmenistan).
Maersk Oil's international activities are carried
out directly or through wholly owned subsidiary companies.
Denmark
Offshore Denmark in the Danish sector of the
North Sea Maersk Oil is operating 14 oil and gas fields on behalf
of Dansk Undergrunds Consortium (DUC). 300,000 barrels of oil
and up to 1 billion cubic feet of sales gas. Partners in DUC are
A.P. Moller—Maersk, Shell and Chevron.
Qatar
Maersk Oil is operating the Al Shaheen Field
offshore Qatar. Current daily production averages some 240,000
barrels of oil.
Algeria
Maersk Oil participates in production from three
major fields and associated satellite fields located onshore Algeria
in the Saharan desert. Current daily production averages some
450,000 barrels of oil.
United Kingdom
Maersk Oil is operating five producing oil fields
offshore UK in the British sector and participating in another
five producing fields. Current daily production averages some
130,000 barrels of oil.
Kazakhstan
Maersk Oil is operating two oil fields onshore
Kazakhstan. Current daily production averages some 6,000 barrels
of oil.
Health, Safety and Environment
It is the policy of Maersk Oil to conduct its
activities in such a manner that health and safety of its employees
and other persons on work sites under its management be of prime
concern at all times and under all conditions and with the protection
of the environment in mind.
People and jobs
Maersk Oil currently has a staff of more than
2,000. In addition the activities provide substantial business
and employment opportunities for contractors and suppliers.
Technology
A substantial part of Maersk Oil's production
is from tight reservoirs, which prior to the 1980's were deemed
unattractive due to low production rates. Maersk Oil's innovative
application of advanced state-of-the-art horizontal drilling and
well technology combined with the cost efficient development concepts
and operations has been the key to technical and commercial success.
www.maerskoil.com
Attachment 2
A.P. MOLLER-MAERSK
IN THE
UK
Overall the A.P. Moller—Maersk A/S ("APMM")
group employs a staff of some 10,000 in the UK, either through
The Maersk Company ("MCO") or through other APMM owned
entities such as Norfolk Line, Netto Stores, Svitzer WijsMuller
and Rosti.
Recently the oil and gas activities in the UK
has been further enhanced by Maersk Oil's acquisition of Kerr-McGee's
UK interests and activities with a staff of more than 500, mainly
based in Aberdeen and at offshore production sites.
Established in 1951, MCO has been a British
ship-owner since 1972 and now ranks second in size in the UK with
42 UK flagged vessels, with many British nationals. A further
19 new-buildings have been planned over the next 2.5 year period.
In addition, MCO manages 16 vessels owned by 3rd parties.
Within the container business, MCO is by far
the largest UK operator, following acquisition of P&O Nedlloyd
("PONL"), with an estimated market share of 18%. Through
either wholly owned subsidiaries or operating division, MCO is
involved in ship owning, liner agency, supply chain management,
drilling rig management and operation, offshore support, intermodal
activities, and haulage.
MCO's latest full-year estimate 2005:
— Group Turnover: GBP 651 million
(excluding PONL)
— Container Business: GBP 280 million
(excluding PONL)
— Other Shipping: GBP 180 million
— Oil and gas related: GBP 191
million
MCO is a major long-term investor in the UK
generally with estimated total investment in excess of GBP 1 billion
in the period 2006-10.
In addition to the above, Maersk Oil expects
investment in the UK in the period 2006-11 to total some GBP 0.72
billion, in addition to operational expenditures.
June 2006
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