Study shows reduced investment due to new UK tax rates

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, May 6 -- A new study published by Scotland’s University of Aberdeen highlights the substantial long-term reductions in field investment and oil and gas production that would result from the increased tax rates recently announced by the British government.

Britain’s Chancellor of the Exchequer raised the rates to 81% to 75% on the older, mature fields subject to Petroleum Revenue Tax (PRT) and to 62% from 50% on fields not subject PRT.

The study examined the economic effects of these increases on fields and projects that could be developed over the next 30 years as well as on existing sanctioned fields.

“These changes are clearly substantial and will inhibit the attainment of maximum economic recovery from the UK continental shelf (UKCS),” the study’s authors found.

They also said there will be two other main effects: “The reductions in posttax returns from field investments will reduce incentives to pursue exploration prospects and reduce the ability of the industry to finance exploration and development projects.

The report notes that there are currently well over 350 undeveloped discoveries in the UKCS and very many potential incremental projects, covering “a very wide range in terms of expected profitability.”

The study’s authors employed a range of oil and gas prices likely to reflect those used for long-term investment by petroleum companies and financing institutions: $50/bbl and 30 pence/therm, $70/bbl and 50 pence/therm, and $90/bbl and 70 pence/therm.

“These are all in real terms and so increase yearly with general inflation,” the authors said, adding, “A threshold investment return reflecting the likely cost of capital was employed.”

The study aimed to highlight the effects on oil and gas production, field investment, and other field expenditures, as well as tax revenues.

The authors summarized their results, which cover 2011-41 in comparison with prebudget 2011 terms, for the three price scenarios:

• The number of new field and project developments is reduced by 123 (36%) compared to prebudget estimates. Total production is reduced by 2.7 billion boe or a reduction of 24.4% of that expected before Budget 2011. Field investment is reduced by £19.2 billion. Total field expenditures are reduced by £34.9 billion. Total tax revenues are reduced by £12.7 billion.

• The number of new field and project developments is reduced by 62 (9%) compared to prebudget estimates. Total production is reduced by 1.7 billion boe or a reduction of 9.7% of that expected before Budget 2011. Field investment is reduced by £19.5 billion. Total field expenditures are reduced by £33.2 billion. Total tax revenues are increased by £23.2 billion.

• The number of new field and project developments is reduced by 79 (7.7%) compared to prebudget estimates. Total production is reduced by 2.25 billion boe or a reduction of 9.5% of that expected before Budget 2011. Field investment is reduced by £29.1 billion. Total field expenditures are reduced by £52.2 billion. Total tax revenues are increased by £51.6 billion.

The report claims that root of the problem comes from the structure of the tax system, which is essentially flat-rate or proportional (except when field allowances apply).

“When the flat-rate tax is raised substantially marginal projects can readily become uneconomic,” the report states.

The report claims that the solution is to have a progressive tax structure with a return allowance whereby the percentage liability to the supplementary charge for new fields and PRT-paying fields is automatically reduced on fields of low profitability and increased when profitability increases.

Contact Eric Watkins at hippalus@yahoo.com.

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