Supplementary memorandum submitted by
Centrica
In the recent budget, the Government put forward
a number of welcome measures that should provide a boost to UK
energy supply security.
Centrica particularly welcomes the introduction
of new arrangements for change of use of facilities that could
be of benefit to the development of new storage facilities, as
well as HM Revenue & Customs' earlier clarification of additional
support for the development of new gas storage in the UK, through
the application of capital allowances for purchase of the "cushion
gas". Centrica believes that there remain a number of challenges
to ensure the delivery of sufficient and timely new storage capacity,
including clarifying the role of The Crown Estate, which acts
as the Government's agency for offshore leases. Centrica looks
forward to working with the Government on these challenges.
Centrica also supports the introduction of incentives
to encourage investment in the North Sea's smaller gas fields.
The high tax rates on the North Sea, where the effective tax rate
is as high as 75% on Petroleum Revenue Tax paying fields such
as Centrica's South Morecambe, act as a continuing deterrent to
investment in a global economy, particularly in a mature oil and
gas province where industry investors take all the risk. Measures
such as these which mitigate the deterrent impact of these high
tax rates are welcome.
However since our previous written submission
to the Committee, the North Sea has continued to decline—a
recent report by Deloitte suggests that UK offshore exploration
activity is down 78% over the past 12 months. So whilst we
strongly welcome the important progress that has been made, we
believe that further reform is needed to the fiscal regime to
ensure that the UK's security of supply is maximised through appropriate
levels of investment, particularly in the current, challenging,
environment.
CHANGE OF
USE/INCENTIVES
FOR DEVELOPING
GAS STORAGE
A favourable ruling was received just before
the budget from HM Revenue & Customs on the availability of
plant and machinery capital allowances for cushion gas, the single
largest cost of a storage facility, this is positive.
The budget also introduced new arrangements
for change of use. This should benefit offshore storage developments,
where we expect the majority of new long duration storage capacity,
of the type to boost security of supply during a severe winter
or major supply failure, to be developed.
However we believe a number of barriers and
uncertainties to storage developments do remain.
— The Crown Estate (TCE), that acts as
the Government's agency for offshore leases, has a duty to enhance
the value of the estate and the return obtained from it. Initial
indications point to the extraction of monopoly rents from storage
developers. TCE should be enabled to adopt a more supportive approach
to offshore gas storage, recognising the vital contribution storage
makes to security of supply. Centrica believes that greater upfront
transparency on pricing would be beneficial in the form of a published
schedule of charges based on capacity measures akin to the regime
for pipelines.
— Centrica is restricted to a maximum reservation
of 15% of the Rough storage facility owned and operated by Centrica,
so Continental European suppliers can book up to 85% of Rough's
capacity to support their European businesses. Unfortunately,
UK suppliers like Centrica don't have the same levels of reciprocal
access to European storage facilities when supplies are tight
in the UK. To help address this deficiency, Ofgem and the Office
of Fair Trading should allow Centrica to compete on a non-discriminatory
basis for access to Rough and all future storage development capacity.
— The recently introduced Energy Act set
the scene for the introduction of a new offshore storage regulatory
framework, which is welcome. Continued and timely progress in
this area will be essential.
INVESTMENT INCENTIVES
A WELCOME
START
The SCT Field Allowance for small fields announced
in the budget is welcome as it may lead to additional developments
of new small fields. The lump sum allowance will be significant
for a 30bcf prospect, though it will be marginal for a 100bcf
prospect. Similar field allowances announced for High Pressure
High Temperature and Heavy Oil are tightly defined so that they
will benefit only a very small number of North Sea prospects.
These new allowances apply, however, only to
new fields, thereby providing no support to further development
of marginal resources in existing fields, potentially a much larger
pool than available in new fields. To address this gap, Centrica
believes that the Government should extend allowances to existing
fields, preferably via a 25% capital uplift on the current 100%
first year capital allowance for upstream investment.
Centrica also supports industry representations
for the extension of PRT supplement beyond payback. PRT supplement
is a 35% uplift on development expenditure available for fields
pre-payback. Against the backdrop of a base production profile,
an extension of uplift beyond payback for new investment is easily
justified. A 35% uplift for capital expenditure for fields already
paying 75% tax will encourage new investment in incremental projects,
and efficiency improvements that will have the effect of lowering
operating costs, extending field life and increasing economically
recoverable reserves.
BUY-OUT
OR ABOLITION
OF PRT
Whilst allowances can provide helpful targeted
incentives to further investment in specific areas, a regime of
allowances is neither the simplest nor the most effective way
to attract a significant level of additional investment into the
UKCS. The key barrier to increased investment in new or existing
fields remains the high effective rates of tax of 50% for non-PRT
fields and up to 75% for fields paying PRT.
As a starting point for radical reform, Centrica
believes that the Government should reform the PRT regime if it
is to meet its stated objectives of maximising recovery of oil
and gas reserves. Centrica believes that such a measure could
be tax neutral for HM Treasury over the medium term, with tax
revenues close to the tipping point at which the tax relief for
costs associated with decommissioning PRT fields will ultimately
offset the short term revenues received by HM Treasury associated
with the residual production from those fields. Centrica continues
to support buy-out or abolition of PRT.
DECOMMISSIONING TRUST
FUNDS
Centrica's concerns about taxation in this area
remain, though HM Revenue & Customs and industry bodies are
expected to discuss these issues shortly.
May 2009
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