BG urges different oil, gas taxation off UK

Energy companies developing gas reserves in the UK North Sea should have a different tax regime than those developing oil, a senior executive from BG Group PLC urged at a meeting in London.

Uchenna Izundu
International Editor

LONDON, June 14 -- Energy companies developing gas reserves in the UK North Sea should have a different tax regime than those developing oil, a senior executive from BG Group PLC urged at a meeting in London.

Chris Cox, vice-president for UK upstream at BG Group, said the current high tax regime in the UK is having a material effect on investment decisions. Within the past 2 years, there have been two major increases in supplementary corporate tax (SCT), bringing it to 20%. Gordon Brown, UK prime minister in-waiting, did not change in his last budget as UK Chancellor the current corporation tax level of 50% and a total tax rate of 75% on production from older fields (OGJ Online, Mar. 21, 2007).

Uncertainties in demand may compromise the development of gas fields on the UK continental shelf (UKCS), according to a report commissioned by Oil & Gas UK. Low gas prices caused by a surplus of gas since the winter of 2005-06 are also hampering development along with increased production costs.

"Many gas discoveries will remain undeveloped without SCT relief or volume or time allowances for new fields," Cox warned at an Oil & Gas UK meeting looking at major policy issues for the UKCS.

According to the recently published UK White Energy Paper, the gas share of UK primary energy demand will rise to 40% in 2020.

Cox stressed that it is possible to reconcile the interests of the UK oil and gas industry and the treasury.

"The treasury is concerned about deadweight costs," he said. "They are scared that they might subsidize developments that would go ahead anyway if they gave it a tax break. If more developments went ahead, the government's take could go up; we've got to pitch it right."

Cox said there was scope to introduce a voluntary code to drive development timing and added that the fallow initiative—which encourages operators drill or surrender licenses on which no significant activity has occurred for 4 years—does not help with rapid development of new discoveries. Company misalignment and complex joint ventures are also jeopardizing new developments in the UK North Sea.

"Resource constraints and competition for funds lead to partner misalignment on development scenarios and timing," he said.

BG Group plans to drill seven exploration or appraisal wells this year.

Contact Uchenna Izundu at uchennai@pennwell.com.

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