Budget proposal will hit North Sea investmentNews // June 7, 2002
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, claims UKOOA.
"Taxes are being increased at precisely the wrong time in the North Sea's life," says Beverly Mentzer, chair of UKOOA's Fiscal Policy Group. "Because of its maturity, high costs and small fields, the UKCS fiscal regime needs to be attractive if companiesare 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."
However, figures released in late May indicate that the additional tax the industry will have to pay as a result of the 33 per cent 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 investor's 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 Government's 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 region's challenging geology and economic environment, means that some industry investment in the North Sea will not be replenished.
"The Chancellor's 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 financingand 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."