Analysts snub proposed UK tax cut

US analysts were less than enthusiastic this week over the announcement by UK officials that, effective Jan. 1, 2004, they will eliminate the current petroleum revenue tax on new shipments of oil and natural gas through pipeline infrastructure built before 1993.

April 15, 2003

2 min read

By OGJ editors

HOUSTON, Apr. 15 -- US analysts were less than enthusiastic this week over the announcement by UK officials that, effective Jan. 1, 2004, they will eliminate the current petroleum revenue tax on new shipments of oil and natural gas through pipeline infrastructure built before 1993.

Proponents claim the measure provides tax relief that would lower pipeline costs and consequently lower overall production costs enough to spur new exploration and development activity in the sluggish North Sea.

"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 Monday, 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 Monday.

"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. The primary beneficiaries of this tax cut will be the potential developers of satellite fields, which may have been uneconomic under the prior tax regime," he said

The PRT is applied at the rate of 50% of profit, field by field (OGJ, Dec. 9, 2002, p. 15). Some fields pay both royalty and PRT.