UK Oil and Gas: Tax Threatens Competitiveness and Stability

A major new study confirms the UK oil industrys belief that the UK will have to compete harder in the world marketplace to attract future exploration investment. The report shows that in many respects, the UK already lags behind other mature provinces such as Norway, the USA, Angola, Indonesia and Australia, let alone the frontier provinces.

The report, incorporating a study by Petroconsultants for the UK Offshore Operators Association (UKOOA), clearly shows that the economics of investing in UK offshore exploration, particularly in view of the current oil price of $14 per barrel, are a fine calculation, even with the existing UK tax regime. Maintaining the success rate in discovering commercial fields is ever more challenging in a maturing province. The hostile environment of the North Sea, coupled with diminishing field sizes, raises costs to some of the highest levels anywhere in the world.

The latest Department of Trade and Industry figures show that the average cost of new fields is in excess of $10 per barrel – more than twice that of certain other regions in the world. The study shows that a low tax burden is essential if the UK is to maintain its competitiveness in an open market.

The threat of increased taxation levels jeopardising future development has been hanging over the UK oil industry since July 1997, when the Treasury announced a review of UK offshore oil and gas taxation.

James May, Director General of UKOOA, said: At least 380,000 jobs depend on oil and gas production. It contributes over £14 billion to GDP and represents 16% of UK industrial investment. We are a real success story and we want to build on that success. Much will be put at risk by an increase in taxation.

Susan Hodgshon, Vice-president of Petroconsultants Economics and Policy Analysis Group says: Most comparisons of global fiscal regimes, including ours, show the current UK system as one of the most investor-friendly in the world, considering its impact on the economics of new field developments after a discovery has been made. However, when a full analysis of the risks associated with discovering these developments is added, as it was in this study, it is clear that such returns are required if future exploration is to prove viable to an existing operator in a high cost, mature area such as the North Sea.

Mark Hope, Technical Director of Enterprise Oil and Chairman of Brindex, said: There are currently around 140 UK continental shelf projects on the drawing board for development within the next five years. These represent tens of billions of pounds of business for UK plc. The current combination of a low oil price and the threat of a tax increase puts many of them

at risk. The deferment of the Clair and Otter projects is an unfortunate early illustration of the problem.

Steve Suellentrop, President of UKOOA, said: The UK oil and gas industry is united in the belief that any increase in the severity of UK fiscal terms will cause a reduction in offshore activity with attendant economic and social consequences for the UK as a whole. It is hard to over-estimate the effects. The reasons for investment would be further reduced and an essential requirement – stability of terms to allow commitment to long-term projects, would be undermined by what is, in practice, retroactive taxation.

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