Memorandum submitted by Shell UK Limited
Shell is pleased to respond to this inquiry
into the implications of recent tax increases for the North Sea
oil and gas industry. Shell has been working in the North Sea
since 1964, and is an operator for around a quarter of the UK's
oil and gas production.
In our response to the Energy Review consultation
in April, we set out a vision in five parts: energy efficiency,
energy diversification, best use of indigenous resources, reducing
carbon emissions, and solutions through people. (See copy of cover
letter that accompanied the Shell submission to the Energy Review
consultation attached.) It is in this context that we respond
here, drawing on one part of the vision; the `best use of indigenous
resources".
EXECUTIVE SUMMARY:
KEY POINTS
In any future energy supply and demand scenario,
indigenous oil and gas will play a significant part in meeting
the UK's primary energy demand.
Indigenous oil and gas should therefore feature
at the heart of UK energy policy.
The UKCS is a maturing province. The industry
faces the challenges of increasing difficulty of access, high
costs—including a rapid increase in supply chain costs this
year, and increasing competition for global investment funds.
Fiscal stability is a key factor in attracting
long-term investment to the UKCS. The December 2005 SCT increase
was the third significant tax change for the industry in three
years. Increasing taxation runs counter to maximizing economic
recovery and enhancing security of supply.
Any reduction in investor confidence in the
UKCS is likely to result in a rapid and irreversible loss of skills
and equipment to other parts of the world—at a time when
both are in short supply.
We continue to believe it would be appropriate
for the Government to restore investor confidence by committing
to review the increase in the Supplementary Corporation Tax rate.
THE IMPORTANCE
OF UK OIL
AND GAS
1. Shell recognises the energy challenge
to ensure sufficient, clean, affordable and secure energy both
nationally and internationally, in the short-term and into the
long-term future.
2. As the DTI's Energy Review consultation
document recognises, the UK is still one of the global top 10
producers of oil and gas, and will remain a major player for many
years.
3. UKOOA estimate oil and gas met 75% of
the UK's primary energy demand in 2005, and demand is forecast
to increase significantly by 2020. Based on the DTI's "favourable
to coal" scenario data, oil and gas is forecast to contribute
78% of primary energy demand in 2020.
4. It is worth noting that, globally, Shell
scenarios indicate that gas could overtake oil as the main fuel
of choice by around 2025.
THE NEED
FOR AN
APPROPRIATE REGULATORY
AND FISCAL
ENVIRONMENT TO
MAXIMISE INDIGENOUS
OIL AND
GAS PRODUCTION
5. The UKCS is a vital national asset and
a significant contributor to the UK's security of supply. Although
the UK has become a net importer, there is much still to be achieved
in the UKCS.
6. While about 34 billion barrels of hydrocarbons
have been produced to date, UKOOA estimates that around 16-27
billion barrels are still to be produced, provided the right regulatory
and fiscal conditions are in place.
7. The contribution to the national exchequer
is about £10 billion of taxes paid in the fiscal year 2005-06.
The contribution to the balance of payments is about £20
billion. About 365,000 jobs in the UK depend on the UKCS. And
the UKCS creates a key platform for British based companies throughout
the supply chain to win business internationally.
THE CHALLENGES
OF THE
UKCS AS A
MATURING BASIN
8. Oil and gas in the UKCS is increasingly
difficult to find and produce, as the remaining potential is distributed
over ever smaller accumulations and in more technologically-challenging
areas. This requires a greater spend on technology, and smaller
finds mean higher unit development costs.
9. Some other cost differences between the
UKCS and other provinces around the world include: a greater burden
of regulation in the UKCS than in other provinces; higher labour
costs due to typically higher levels of operational expenditure
by contractors; a harsher environment that typically requires
larger rigs at a higher cost.
10. Added to this, suppliers' costs have
risen rapidly. In significant sections of the UK supply chain
rates have risen to match current oil prices.
11. Take the costs of securing rigs for
example: In mid-2004, the average fixture rate to secure a jack-up
rig was around $55,000 a day. In April 2006, the rate for the
same rig had more than trebled to $176,000 a day.
12. Or to take the example of a semi-submersible
rig; in mid-2004 fixture rates were around $50,000/day. By April
2006 these had increased more than seven times to $365,000. (Source:
ODS Petrodata, North Sea Rig Report.)
13. Casing and tubular products used in
the drilling of wells is another area where prices have doubled
in the last 18 months, partly due to forces outside our industry
which have driven up the costs of important commodities such as
steel. In the wider economy there is rising inflation.
INCREASING TAXATION
RUNS COUNTER
TO MAXIMIZING
ECONOMIC RECOVERY
AND ENHANCING
ENERGY SECURITY
OF SUPPLY
14. As Shell and industry have consistently
stressed to government, fiscal stability is a key factor in attracting
investment to the maturing UKCS.
15. This was the third significant tax change
for the industry in three years. The SCT measure alone budgeted
for the removal of £6 billion from the industry in the next
three years.
THE IMPACT
OF CUMULATIVE
TAX MEASURES
ON INVESTOR
CONFIDENCE
16. At current oil prices, it is unlikely
that activity levels will drop this year. Contracts for 2006 were
committed to prior to the 2005 Pre-Budget Report.
17. However, the cumulative implication
of the tax measures on top of rapidly increasing costs are having
a significant negative impact on project economics, to the extent
that a number of projects are being reviewed.
18. The latest 10% increase in the SCT rate
equates to a 17% reduction in our post-tax cash flow. This is
significant for any company and is a substantial burden on future
investment. The commitment of the Treasury to a strategic review
of UKCS taxation together with industry is very important against
this background.
19. The competitive position of the UKCS
with respect to the rest of the world has been eroded.
20. It is well known that human and engineering
resources are in tight supply worldwide. Once these resources
leave the UKCS it is difficult to get them back.
21. The DTI's Energy Review consultation
document states that maintaining investment in further exploration
and development in the UKCS remains a priority. It states the
difference between the UKCS attracting investment and not doing
so is estimated to be the difference between meeting half of the
UK's oil and gas needs by 2020 instead of just 10%.
CONSIDERATIONS LOOKING
AHEAD
22. Shell is pleased the Government noted
the importance of a positive climate for investment and the need
to maximize economic recovery in the UKCS in the March 2006 Budget.
23. We continue to believe it would be appropriate
for the Government to support this and restore investor confidence
by committing to review the increase in the Supplementary Corporation
Tax rate.
24. The Ring Fence Expenditure supplement
(RFES) that was announced in the budget alongside the SCT increase
is intended to act as an investment incentive. It is aimed at
companies that do not yet have any taxable income against which
to offset their exploration and appraisal capital allowances.
We need to be clear that the benefit to industry is estimated
at only £5 million in 2008-09.
25. We welcome the Government's recent consultations
with the oil and gas industry, including the Treasury's discussions
to gather views on the current structure of the North Sea fiscal
regime, in particular on issues that impact the stability of the
regime as the basin continues to mature. We have and will provide
input to these where we can usefully contribute.
26. We are fully supportive of the PILOT
process and we would like to see a renewed focus on working within
PILOT to identify win-win proposals that can provide the long-term
investment climate required in the UKCS.
27. Industry would like to be able to engage
more effectively with the Treasury so that decisions might take
into account the lifetime of existing infrastructure and the closing
window of opportunity to maximize economic recovery from the UKCS.
28. In our response to the Energy Review,
we suggested the government should examine whether there is scope
for enhancing the coordination across government of all aspects
of energy policy under one Minister; general energy policy, the
exploitation of indigenous resources, climate change, international
agreements for exploitation of the North Sea, transport fuels,
carbon capture and storage, planning consents for energy related
activities and incentives for research and deployment of new energy
and carbon mitigation technologies.
29. There are matters that necessarily fall
elsewhere, such as fiscal policy and international relations aimed
at securing energy supplies. Enhancing coordination could involve,
for example establishing cabinet level responsibilities for delivery
of all aspects of energy policy.
30. The Government's commitment to no further
increases in North Sea taxation for the lifetime of this Parliament
is noted, but it is important to stress that the energy business
is a long-term business, and projects of 10, 15 or many more years
duration require long-term investment decisions and supporting
stability.
ABOUT SHELL
IN THE
UK
31. In the UK, Shell is engaged in the business
of Exploration and Production, Oil Products, Chemicals, Gas and
Power, Renewables and other activities. With centres in the north-west
of England, Scotland and London, Shell provides more than 8,000
direct jobs and 80,000 indirect jobs across the United Kingdom.
32. The UK is a core area for Shell:
FTSE top 10 company
Shell in the UK paid $1,209 million in tax for full
year 2005
Shell spent approximately $4.5 billion with UK suppliers
in 2005
Global Retail, Shipping and Aviation businesses are
based in London
Shell has approximately 1,000 petrol stations in
the UK
Is an operator for around a quarter of the UK's oil
and gas production
Provides 15% of the UK's oil products
If you have any queries regarding this submission,
please contact:
Alex Rhodes
External Affairs
Shell U.K. Limited
30 June 2006
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