UK officials hope the oil and natural gas industry will be encouraged to develop marginal North Sea fields because of the economic benefits of some recently announced relief from the petroleum revenue tax.
Analysts based in the UK and US, however, were less than enthusiastic about the announcement.
Effective Jan. 1, 2004, the UK will eliminate the PRT on new shipments of oil and gas through associated pipelines and platform infrastructure built before 1993 (OGJ Online, Apr. 15, 2003).
Proponents claim the measure provides tax relief that will lower pipeline costs and consequently lower production costs enough to spur new exploration and development activity. Tariffs make up a significant proportion of field operating costs.
WoodMac view
In an April research note, Edinburgh-based consultant Wood Mackenzie Ltd. said, "By lowering future tariffs by up to 50%, it is expected that the economics of some marginal fields will improve sufficiently."
Lower tariffs could encourage companies to reconsider as many as 250 undeveloped discoveries and potentially improve the economics of new discoveries, the consultant said.
WoodMac forecast that the net present value (NPV) of the UK government take will decrease by £200 million because of the tariff change from fields expected to commence production in the next 4 years.
"This compares to a total NPV of government take of more than £35 billion from current commercial fields in the UK," WoodMac added.
Lehman Bros., BAS views
"Although a positive sign, the magnitude of the proposed tax relief does little to counterbalance last year's 10 (percentage point) tax increase (in the UK corporate tax rate to 40%)," said Angeline M. Sedita, an analyst with Lehman Bros. Inc., New York. "If implemented," she said, the measure "will have only limited effect on drilling activities in the region."
"Elimination of the tax on this 'tariff' income is intended to stimulate development of satellite fields in and around existing infrastructure, as well as encourage transportation of Norwegian gas to the UK," Robert S. Morris, an analyst with Banc of America Securities reported.
"Although we believe there will be a slight positive impact for companies that own this infrastructure, the potential benefit is still too early to quantify," he said.
