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.

Related Articles

PHMSA proposes pipeline accident notification regulations

07/02/2015 The US Pipeline and Hazardous Materials Safety Administration has proposed new federal oil and gas pipeline accident and notification regulations. ...

FourPoint Energy to acquire Anadarko basin assets from Chesapeake

07/02/2015 FourPoint Energy LLC, a privately owned Denver company, plans to acquire oil and gas assets from Chesapeake Energy Corp. subsidiaries Chesapeake Ex...

Puma Energy completes purchase of Murco’s UK refinery, terminals

07/02/2015 Singapore-based Puma Energy Group Pte. has completed its purchase of UK midstream and downstream assets from Murco Petroleum Ltd., a subsidiary of ...

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

API to issue recommended practice to address pipeline safety

07/01/2015 The American Petroleum Institute expects to issue a new recommended practice in another few weeks that addresses pipeline safety issues, but the tr...

Shell Midstream Partners takes interest in Poseidon oil pipeline

07/01/2015 Shell Midstream Partners LP has completed its acquisition of 36% equity interest in Poseidon Oil Pipeline Co. LLC from Equilon Enterprises LLC, a s...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

FWS issues Shell letter of authorization on Chukchi Sea lease

07/01/2015 The US Fish & Wildlife Service issued Shell Gulf of Mexico Inc. a letter of authorization (LOA) related to the potential disturbance of polar b...
White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts


OGJ's Midyear Forecast 2015

When Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

When Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST



On Demand

Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected