Memorandum submitted by UK Offshore Operators
UKOOA and its members are profoundly disappointed
by the contents of the Treasury's Pre-Budget Report, relating
to the UK offshore oil and gas industry. We believe that the lessons
of 2002, when a similar tax increase was imposed, have not been
learnt, nor have the industry's arguments in the intervening period
about the need for fiscal (and regulatory) stability in order
to sustain investment in the now mature UK continental shelf (UKCS)
been fully appreciated within government.
This industry invests for the long termby
most standards, the very long term (its earliest North Sea investments
are still in production after nearly 40 years). Therefore, its
performance and its profitability need to be judged in the longer
term, not short term. The offshore oil and gas sector has consistently
been the largest industrial investor in the UK for several decades;
it also one of the highest value adding sectors (DTI figures).
These are attributes which government has clearly shown that it
desires throughout the economy.
Furthermore, the changes are likely to affect
security of future energy supplies, just as 2002's changes did.
2. IMPACT OF
In the past three years, the UKCS
has faced three major tax increases: the introduction of Supplementary
Corporation Tax (SCT) in 2002, acceleration of Corporation Tax
payments in 2005 and now this doubling of SCT to 20%, effective
from 1 January 2006.
The increase in 2002 was eased by
the removal of Royalty and the introduction of 100% capital allowances.
In comparison, the introduction of the "ring fenced expenditure
supplement" announced in this PBR will have a trivial effect
(eg £5 million for industry in 2008-09 vs tax increase of
£2.2 billion in 2006-07).
Fiscal (and regulatory) stability
are pre-requisites for attracting investment. Together, these
tax changes undermine the UK's reputation as a stable place to
The latest tax increase amounts to
an extra £6.5 billion to be paid by the industry over the
next three years. It is inconceivable that this extra tax will
not reduce investment.
The UKCS has entered a mature phase
which will lead to rapid decline in production over the next 10
to 15 years unless the recent high rate of investment is maintained.
Based on current plans, our analysis shows that each £1 billion
reduction in investment will result in the irrecoverable loss
of at least 250 million barrels of oil equivalent,
leading to the swifter onset of decommissioning and abandonment.
Therefore, less investment now will
lead directly to lower overall recovery of UKCS reserves. UKOOA's
estimate is that these changes will result in a permanent loss
of production of over 1.5 billion barrels of oil equivalent. This
will affect the UK's future security of supply.
3. TAX COMPARISON
By world standards, the UKCS is a
high cost oil and gas region (ref Wood Mackenzie study in 2004),
because of its maturity, the small size of new fields and the
technical risks. The tax regime needs to recognise these facts
in order to ensure maximum economic recovery of reserves.
The recent changes have put the UKCS
at a disadvantage compared with Norway and regions of similar
maturity (US Gulf of Mexico and Netherlands). UKCS tax rates have
now risen from 40% to 50% for new developments and from 70% to
75% for older fields, resulting in an effective overall rate of
57% (compared with 49% before the PBR).
At 75%, older fields like Forties
(which produces only about one tenth of the amount of oil which
it did 20 years ago) now has a tax rate very close to new, very
large Norwegian fields (78%).
|Country / Region||Government Tax Take (%)
|UKCS (post PBR)||57%
|Gulf of Mexico (shallow water)||45.8%
|Gulf of Mexico (deep water)||43.1%
4. UKCS RATE OF
Our analysis shows that the UKCS is not making
a 40% return on capital (see attached report for the Paymaster
General of 22 November 2005).
Pre-tax, profitability had been declining since
2000 and only showed an upturn in 2005 to 32% (see attached graph,
UKCS Rate of Returnplease note that the price of oil is
in £, not $).
Because the industry is treated differently with
regard to its taxation, the UKCS should be compared with other
industries by calculating its return on capital after special
taxes (SCT and PRTPetroleum Revenue Tax).
Since 2000, the UKCS return on capital, after
special taxes, has fallen from 28% to 25%, while the comparable
return on capital for services has remained stable at 17% and
for manufacturing at 7-8% (ie before normal Corporation Tax at
30% has been charged on any of the above sectors).
The UKCS return on capital after all taxes (ie
including normal CT at 30%) fell from 23% in 2000 to 15% in the
first half of 2005, demonstrating that the changes made in 2002
were already enabling the Treasury and the public purse to benefit
from UKCS increasing revenues as the oil price rose (see attached
graphs, UKCS Rate of Return and Evolution of 2005-06 Tax revenue
We also attach a copy of our letter and report sent to the
Paymaster General on 22 November 2005, following a meeting on
2nd November, regarding the competitiveness and profitability
of the UKCS oil and gas province.
6 December 2005
"barrel of oil equivalent" or "boe" equates
gas output with oil, so that a single measure can be made of the
two in combination. Back
Petroleum Revenue Tax (PRT) represents about 25% of total tax
revenues from the UKCS. Back