Further supplementary memorandum from
Oil and Gas Independents' Association (OGIA)
With respect to your request for further written
evidence on the provisions in the 2009 Budget relating to
the North Sea fiscal regime following the Chancellor's statement
on 22 April 2009, we would like to thank you for this further
opportunity and would like to make the following submission.
As a general comment our membership were encouraged
by the fiscal changes. They indicate that there has been an effective
exchange of ideas between Government and Industry. The UKCS is
at a mature stage in its development and there is recognition
of this in the fiscal changes. Full utilisation of existing infrastructure
has been encouraged, there is an understanding that the more challenging
resources need improved fiscal terms and there is assistance for
Companies that are specifically focussed on investment in the
UKCS, which are all positive steps.
FIELD ALLOWANCE
This was the major change to result from the
budget statement. It was the culmination of a long and detailed
consultative process. We see this as an encouraging first step
and is a recognition by Government that the challenging resources
require a less onerous fiscal treatment. The allowances as announced
in the budget were in general lower than those proposed by ourselves
and the mechanism we suggested more closely tracked the size of
the asset. The result of the mechanism outlined in the budget
is less size sensitive and is therefore more advantageous to smaller
resources in the three targeted areas of small fields, ultra heavy
oil and ultra HPHT. The high impact, large resource assets have
not benefited as much as hoped.
We are concerned about the definition of Ultra
HPHT and feel there should be consideration of a wider criteria.
As currently defined the resources captured by this definition
are limited to one risked project which will be insufficient to
contribute the two billion incremental barrels the Chancellor
targeted in his Budget Statement.
Having created the Field Allowance we would
encourage Government to look at additional qualifying targeted
areas. The two areas that we would focus on would be assets West
of Shetland and Non Conventional Gas.
Assets in the area West Of Shetland face considerable
challenges with respect to weather and infrastructure additional
fiscal assistance is required to accelerate activity. Under the
heading of Non Conventional Gas we would include gas from tight
reservoirs and gas that requires specialist treatment to improve
its quality. We are ready to engage in further discussions on
these two areas.
We believe that to achieve the goal of an additional
two billion barrels of developed oil the qualification definition
for assets eligible for the Field Allowance needs to be relaxed
as discussed.
Other items addressed in the Finance Bill:
(a) "Changes to the chargeable gains
regime within the North Sea ring-fence to remove chargeable gains
entirely from licence swaps and making gains exempt where disposal
proceeds from ring fence assets are reinvested within the UKCS."
This has been well received by our membership and is a logical
improvement to the fiscal regime. It is of specific assistance
to companies who are not yet in production and who are focussed
on investment activity on the UKCS.
(b) "Changes to the North Sea fiscal
regime to remove potential barriers to projects that re-use North
Sea infrastructure for non-ring-fenced purposes including gas
storage, carbon capture and storage and wind energy." We
feel this is a positive step and will encourage the prolonged
use of existing infrastructure. Extending the life of these assets
will allow smaller deposits to be developed as well as create
incremental benefits from the change of use.
(c) "Amending the petroleum revenue tax
(PRT) regime to ensure that companies whose production licences
have expired are still able to access PRT decommissioning relief
where appropriate."
(d) "Changes to the PRT regime to reduce
the administrative burden it imposes, simplify compliance and
repeal obsolete legislation." We feel that points (c)
and (d) are a fair and logical amendment to the fiscal regime.
TAX RELIEF
FOR COST
OF CUSHION
GAS IN
GAS STORAGE
Cushion gas is now considered as plant for the
purposes of plant and machinery capital allowances, expenditure
on cushion gas will now be eligible for capital allowances. We
believe that this treatment will improve the economics of gas
storage projects and lead to the further development of what will
become and important area in the UK's energy infrastructure as
we become more dependent on imported natural gas.
I addition to the comments specific to the 2009 Finance
Bill we would like to reiterate two points we have made in earlier
correspondence.
Access to Infrastructure—Existing and
anticipated future discoveries on the UKCS cannot support their
own dedicated infrastructure. Hence the availability of existing
infrastructure will have a major impact on exploration and investment
plans. Modest hydrocarbon pools require a competitive and efficient
route to market. The current regulations and guidelines are not
being enacted by the industry or enforced by industry/government.
One of the biggest problems is trying to conclude negotiations
in a timely manner, unless of course the Infrastructure Host Owner/Operator
has a stake in the potential development. In such cases the problems
appear to disappear and negotiations proceed to a very rapid timetable.
This seems to us to be a clear breach of the Commercial Code of
Practice which Industry and Government have signed up to but Government
appears unwilling to intervene to enforce participants to honour
their commitments.
Refund of Exploration Allowances—Small
companies, of which there are currently many active on the UKCS,
partly as a result of the Government's praise-worthy encouragement,
now find equity markets (for exploration funds) and debt markets
(for development funds) closed. Furthermore the current fiscal
regime disadvantages such investment. To resolve this we support
modifications to the Ring Fence Expenditure Supplement (RFES)
to allow a cash payment of the tax relief. In addition we propose
that the tax relief due on the drilling of Exploration and Appraisal
wells should be paid at the time of drilling, in line with the
practice in Norway. For technical reasons this would actually
be of some benefit to the Government given that the Government's
cost of capital is below the 6% interest rate that such sums currently
accrue.
Finally, we have a great deal of respect for
the staff of DECC, they do a very good job under difficult circumstances.
We understand that they are very stretched and would encourage
Government to utilise some of the UKCS licence fee to fund an
expansion of their resources.
We would like to thank the staff of HMT and
DECC for their assistance during this consultation process and
look forward to working with them in future to address the further
improvements outlined above.
May 2009
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