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UKOOA Welcomes Abolition of PRT on Tariff Income From New Contracts Using Existing Infrastructure
Steve Harris
On 9 April 2003, the Chancellor of the Exchequer announced that he would abolish Petroleum Revenue Tax (PRT) on tariff income from new contracts using UK offshore infrastructure. Steve Harris, communications director at the UK Offshore Operators Association (UKOOA) welcomes the move, arguing that it will boost investment and release more oil and gas from fields in and around the North Sea.
Infrastructure taxation emerged as one of the key issues in the UK-Norwegian discussions that have been taking place over the past twelve months. Industry representatives from both countries have been working with the two governments on a range of issues to promote greater cross-border co-operation so that recovery of remaining North Sea reserves may be maximised.
The report published by the UK-Norway North Sea Co-operation workgroup last August acknowledged that “some adjustments to the fiscal regime may be justified to promote optimal infrastructure usage and avoid stranding reserves and investment”, recommending that the taxation regime for UK infrastructure be reviewed.
The PRT relief announced in the Budget was a result of that work. It will apply to tariff income from new contracts signed on or after 9 April 2003 but will not come into force until 1 January 2004. Income from contracts in place before 9 April will continue to be liable for PRT.
Tariffs earned by UK offshore infrastructure are taxed at different rates, principally depending on the age of the system. PRT applies to fields which received development consent on or before 16 March 1993 and to the pipeline systems and other facilities which service a PRT paying field.
Therefore, after corporation tax and the special 10 per cent supplementary CT charge paid by the offshore oil and gas industry, tariff income received by assets liable to PRT is subject to tax at a total rate of 70 per cent while non-PRT paying assets are subject to tax at 40 per cent.
This creates distortion in the tax regime, which places much UKCS infrastructure at a competitive disadvantage and can affect the choice of the pipelines or systems used by third parties.
According to Professor Alex Kemp, petroleum economist at the University of Aberdeen, abolishing PRT on new tariff business could reduce the tax on income by as much as 42 per cent. This should intensify competition between infrastructure owners and lead to lower tariffs. Since tariffs can account for over 60% of operational expenditure on new developments, the move, by helping to reduce the cost of using UK infrastructure, could mean that the development of North Sea discoveries currently considered uneconomic becomes viable. Professor Kemp estimates that a further 500 million - 700 million barrels of oil equivalent could potentially be unlocked in this way, representing new capital investment in the North Sea of £2.5 billion - £3 billion over the next 30 years.
There are of course further benefits to the UK in terms of the extra tax revenues this additional production will generate as well as opportunities for the construction and other supply sectors.
Securing new business for the UK’s existing offshore infrastructure
will also prolong its life, deferring abandonment. This is important
because existing infrastructure needs to be preserved for the future
to access further reserves and to encourage new exploration. It will
also improve the prospects of securing Norwegian gas exports to the
UK through existing UK gas infrastructure.
Figure 1: Exploration success rates in global basins 1991-2000. Illustrates the exploration success experienced by the oil and gas industry over the last 10 years across 50 countries in a study carried out by Wood Mackenzie in 2002. Despite, and to some extent because of, its relative maturity the UK areas do not rank very highly, particularly in terms of the important commercial success rate. (Click image for larger view)
Figure 2: Commercial discovery size in global basins 1991-2000. In recent years, the average size of discoveries on the UKCS has been in the 25-20 million boe range. Generally, only the larger of these discoveries have proved commercial in the high cost North Sea environment. Figure 2 shows that the average size of UK oil discoveries does not rank highly on a global scale. (Click image for larger view)
Figure 3: Unit costs in global basins for fields developed since 1995. The relatively small size of UK discoveries, when combined with the high cost North Sea environment, results in the UK having the second highest unit costs for fields developed since 1995 amongst 57 countries considered in a Wood Mackenzie study. Even the shallower water UK Southern Basin ranked tenth highest in terms of unit costs. It should be noted that exploration costs are not included, which for the UKCS represent an additional $4/boe. (Click image for larger view)
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