Select Committee on Treasury Written Evidence

Memorandum submitted by UK Offshore Operators Association


  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 term—by 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.


    —  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 invest.

    —  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[2], 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.


    —  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)[3].

    —  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)
Netherlands (offshore)
Gulf of Mexico (shallow water)
Gulf of Mexico (deep water)


    —  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 Return—please 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 PRT—Petroleum 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 Forecasts).

  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

2   "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

3   Petroleum Revenue Tax (PRT) represents about 25% of total tax revenues from the UKCS. Back

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