Industry Perspectives

International Competitiveness - Fiscal and Regulatory Environment

Tax rates for oil and gas production now range from 50% - 75% since the latest increase in the Supplementary Charge to Corporation Tax in January 2006. Coupled with the frequent increases and adjustments to the fiscal regime in the last five years, there is a heightened sense of fiscal uncertainty when considering the UK from an investor’s perspective. The industry is seeking a more competitive regime which provides certainty for both existing and future investment, as well as with respect to decommissioning activities.

This is a global industry and so new ways will have to be found to create an advantage over other oil and gas provinces. It is important, therefore, that the fiscal and regulatory regime reflects both the UKCS’s competitive position internationally and its maturity. It is widely accepted that the tax burden will have to be reduced with time, if the maximum recovery of reserves is to be achieved. Higher rates of taxation raise economic thresholds for investment and lead to less activity and lower recovery in the longer term.

There are signs that the government is recognising some of the limitations of the current regime. In December 2005, it announced its intention to start discussions with the industry to examine the wider structural issues of the fiscal regime, including the lifespan of Petroleum Revenue Tax (PRT), decommissioning and overall competitiveness. It is clear that all parties wish to see the maximum recovery of oil and gas and the discussion rightly centres on how this may best be achieved. This dialogue is continuing and the industry is currently in the process of responding to the latest consultation document issued by the Treasury in Budget 2007 on the future of UKCS taxation.

Furthermore, in the most recent budget, it was announced that, from 1st July 2007, previously decommissioned fields that are redeveloped will no longer be liable for PRT. This measure should encourage investors to consider the possibility of reactivating abandoned fields and use new technology to recover untapped reserves. It is a clear demonstration of how the removal of a tax will promote investment, generate new production and, subsequently, greater tax revenues.

For the UKCS to attract investment, the investor must consider a range of factors in which the fiscal regime plays an important role. Many of the criteria which are routinely considered are shown below:

The North Sea is one of the most expensive oil and gas regions in the world, given the water depths and harsh marine environment; costs have risen sharply in the last two to three years. The UKCS, as the most mature area of the region, has to compete with other less mature and less costly oil and gas provinces which offer investors some attractive choices when looking where to invest. In the last 10 years, the success rate and size of fields discovered in UK waters have diminished significantly (i.e. prospectivity has fallen materially). Discoveries now are routinely small, typically averaging at 20 million boe or less. It is now both more difficult and more expensive to find oil and gas than it was 10 or 20 years ago. The challenges set by geology at this late stage in the life of the UKCS have an important effect on competitiveness compared with other, less mature oil and gas regions. An interesting comparison of maturity is given in the map below which presents a picture of how much drilling has been undertaken in the central and northern North Sea in British and Norwegian waters; the UK sector has clearly been more heavily explored. Norway also has the advantage of other, unexplored prospects in the waters of the Norwegian and Barents Seas further north. Overall, Norway enjoys appreciably better prospectivity.

Figure 48: UK & Norway wells drilled 1965 -2003

There is a range of non-fiscal measures which is also being undertaken by DTI and the industry in conjunction with Oil & Gas UK to help promote the investment and activity. These include the following, for which more details may be found in Appendix B of this report:-

Despite all of the challenges, there are major strengths which make the UKCS a good place to conduct business: political stability, low barriers to entry, extensive infrastructure, a strong supply chain and a highly skilled workforce. There are still significant opportunities to be pursued, not least because the UK has developed as an international centre for oilfield goods and services; these have grown rapidly over the last decade and now constitute a major exporting industry. These strengths provide secure foundations for building the right future for this industry.