UK North Sea operators criticize 2007 budget tax regime

Uchenna Izundu
International Editor

LONDON, Mar. 21 -- Energy companies operating in the UK North Sea are disappointed that UK Chancellor Gordon Brown has failed to adjust the tax system in his last budget to encourage more production in the mature province. Brown did not change the current corporation tax level of 50% and a total tax rate of 75% on the production from older assets for North Sea companies. Brown is expected to assume leadership of the ruling Labour Party in the summer and become UK Prime Minister if he does not face any challenges from within his party.

Brown acknowledged that there are higher operational costs in the UK North Sea and said that he expects tax revenue to fall in the future by £4 billion/year because of lower production levels. In this tax year, the Treasury earned £8 billion compared with £13 billion previously.

Malcolm Webb, chief executive of the UK Offshore Operators Association (UKOOA), criticized the decision to maintain the current tax regime. Webb said: "The Chancellor was quick to raise the tax take from this industry when he saw oil and gas prices rising towards $60/bbl. But now that the price of gas—which makes up almost half of total UK production—has fallen to the equivalent of $20/bbl, he sits on his hands. With cash flows from UK gas fields now under severe pressure and the average cost of new developments running at $25/bbl, doing nothing is simply not good enough. The Treasury needs to wake up to current realities."

According to data collected by UKOOA about its members' investment and activity plans for 2007, the forecast for capital investment will drop by £1-1.5 billion, to £4-4.5 billion, after 3 years of growth. The UK Continental Shelf holds an estimated 25 billion bbl of recoverable oil and gas, but these lie in difficult-to-access reservoirs. UKOOA said North Sea operators could still produce 40% of the country's primary energy needs in 2020—and significant volumes for decades to come.

Martin Findlay, oil and gas partner at KPMG, told OGJ that the current tax regime is likely to drive companies away from the UK North Sea. "Companies instead will head to other places like the Gulf of Mexico to invest and this would mean lower oil and gas production from UK fields. There are varying forecasts about how much oil and gas is left—this is about 10-15 years."

Derek Leith, head of oil and gas tax at Ernst & Young, said the upstream North Sea sector has lost out on tax cuts compared with other industries in the budget on Mar. 21. Brown "has also decided to keep his options open on Petroleum Revenue Tax and decommissioning costs by announcing he welcomes the opportunity to discuss the issue with industry further," Leith said.

Richard Wilson, chairman of the Oil & Gas Independents Association, was also disappointed with the chancellor's tax stance on the UK North Sea. "We note that the Treasury has today issued a discussion paper on the North Sea fiscal regime and we will be consulting on that in due course," he said. The deadline for submissions from interested parties will close next September.

Contact Uchenna Izundu at uchennai@pennwell.com.

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