Thursday 23 May 2002

Industry Budget Proposal Will Hit Oil and Gas Investments

The UK Offshore Operators Association (UKOOA), the representative body for 30 exploration and production companies in the UK, has raised concerns that investment in the UK continental shelf (UKCS) will be hit as a result of the proposed changes to the North Sea fiscal regime.

The lack of industry consultation and a simplistic analysis of the Budget impact have led the Treasury to the wrong conclusion that future investment will remain unchanged.

Taxes are being increased at precisely the wrong time in the North Seas life, says Beverly Mentzer, chair of UKOOAs Fiscal Policy Group. Because of its maturity, high costs and small fields, the UKCS fiscal regime needs to be attractive if companies are to continue to view the North Sea as a good province to invest in.

In a Wood Mackenzie international competitiveness study published in February 2002, it was stated that the analysis suggests there is no room for additional fiscal rent to be extracted from upstream companies on an expected monetary value basis.

Figures released today indicate that the additional tax the Industry will have to pay as a result of the 33 percent increase in Corporation Tax announced by the Chancellor in the Budget will amount to as much as £8 billion to 2010. This is substantially more than the £6 billion previously estimated by independent analysts immediately following the Budget.

UKOOA estimates that exploration and production expenditure in the UK could fall by up to

20 percent over the next eight years as a direct result of the tax changes, putting up to 50,000 jobs at risk.

It is not realistic to contend, as the Government does, that an additional tax hit of this size, which came without warning, will not have an impact on future investment in the UK continental shelf (UKCS). The fiscal instability created by the retroactive impact on the economics of recent investments will be in the forefront of every potential investors mind.

The new analysis of the Budget impact was carried out by the leading petroleum economist Professor Kemp at Aberdeen University. It shows that using the Governments own assumption of an average oil price of $21.5 per barrel, £7.6 billion will be levied from the UK oil and gas industry between now and 2010. Furthermore, it demonstrates that even if the oil price were to fall as low as $15 per barrel, the industry would still face a hefty additional tax bill of £3.7 billion.

You cannot take billions out of an industry without impairing its ability to invest, says Beverly Mentzer. Companies now have to rebalance the allocation of capital and human resources across the globe. The loss of investor confidence in the fiscal stability of the UKCS, coupled with the regions challenging geology and economic environment, means that some industry investment in the North Sea will not be replenished.

The Chancellors measures will inevitably hit exploration activity in the UK, threaten the development of marginal projects and hasten the decommissioning of mature fields. It is particularly punitive for smaller companies who rely heavily on financing and new entrants who cannot fully utilise the capital allowances. The result will be an accelerated decline of production and jobs, and Britain having to rely sooner on foreign imports of oil and gas.

Note to Editors

1. The UK Offshore Operators Association (UKOOA) is the representative organisation for the UK offshore oil and gas industry. Its 30 members are licensed by the British Government to explore for and produce hydrocarbons in UK waters.

2. In 2001, total investment by the offshore oil and gas industry in the UK (including exploration, development and exploration costs) was around £8 billion. Development investment increased by 25 percent on the previous year, at £3.5 billion.

3. Total UK oil and gas production in 2001 is estimated at 4.3 million barrels of oil equivalent (boe)

4. UK remaining reserves of oil and gas are estimated between 26-34 billion boe, including 5-11 billion boe of reserves yet to find.

5. The average size of new field discoveries in the UKCS is 25-30 million boe.

6. The impact of the tax changes on jobs is calculated on the basis that every £ million spent across the sector supports an estimated 32 jobs.

See also media briefing 'How UK Oil and Gas Production is Taxed'.

For more information, please call 020 7802 2400.