SHELL U.K. BACKS PRT REFORMS

Shell U.K. Ltd. has spoken out in favor of the U.K. government's proposed oil industry tax reforms disclosed in March. Shell said the thrust of the government's proposal is correct and reforms should proceed June 30 as planned (OGJ, Mar. 22, p. 31). Reducing the petroleum revenue tax (PRT) on existing fields will encourage investment, Shell said. "The mature state of the North Sea as an oil and gas province requires greater emphasis on maximizing recovery from existing fields."

May 10, 1993

6 min read

Shell U.K. Ltd. has spoken out in favor of the U.K. government's proposed oil industry tax reforms disclosed in March.

Shell said the thrust of the government's proposal is correct and reforms should proceed June 30 as planned (OGJ, Mar. 22, p. 31).

Reducing the petroleum revenue tax (PRT) on existing fields will encourage investment, Shell said. "The mature state of the North Sea as an oil and gas province requires greater emphasis on maximizing recovery from existing fields."

Planned removal of PRT relief on exploration and appraisal (E&A) also fits with the North Sea's maturity, the company said. Drilling plans based on technical merit rather than availability of high levels of tax relief would better balance maximization of output from existing fields against exploration.

"Exploration levels were already falling because of a lack of attractive drilling prospects and the expectation that oil prices will remain low. Abolishing PRT on all new fields will encourage exploration in areas where the risks of failure are higher, but where there is a chance of bigger finds, such as west of the Shetland Islands."

BACKGROUND

Chancellor of the Exchequer Norman Lamont disclosed a plan Mar. 16 to cut the PRT on Britain's producing oil and gas fields to 50% from 75%. He also proposed to remove E&A drilling allowances that enable companies to claim about 80% of costs against PRT on their producing fields.

U.K. oil companies quickly split into two groups: those that would benefit from the PRT reductions and those that would lose out on E&A concessions removal.

The first two companies to give a reaction to the budget were British Petroleum plc and Amerada Hess Ltd. BP said PRT reform was long sought after and would stimulate development of peripheral reserves in mature fields. Amerada Hess said E&A cost increases would reduce the viability of marginal fields (OGJ, Mar. 29, p. 33).

Sam Laidlaw, Amerada Hess managing director, led a campaign to persuade government to reconsider the reforms--and in particular to offer transitional relief for any changes.

This campaign showed its effect in Parliament most recently May 4, when Robert Hughes, Labour member of Parliament for North Aberdeen, said PRT reforms savagely attacked small companies in the drilling and exploration sector.

Prime Minister John Major responded that PRT reforms were good for jobs and good for Britain and would improve development incentives. Full debate of the issue in Parliament is expected.

RESENTMENT

Behind the public comments lie different approaches to the government's policy of the last 10 years, which aimed to maintain high drilling levels on the U.K. continental shelf.

There is private resentment, among oil majors, of smaller companies they believe won acreage in recent offshore licensing rounds because of higher than necessary well commitments.

Small companies grew with the help of E&A drilling concessions, with some buying producing assets with a view to tax concessions. However, those companies believe they have operated according to U.K. government rules and this sudden change in the rules is unfair to them.

Shell supported the government stance of immediate changes to PRT rather than phased introduction. Neither should there be transitional relief on E&A drilling commitments in recent license awards, Shell said, because companies can still argue with the Department of Trade & Industry for reduced drilling commitments on technical or economic grounds.

ANALYST'S VIEW

A television appearance by Malcolm Naylor, tax partner at analyst Arthur Andersen, London, cast doubts on the new PRT regime's revenue raising ability.

He said, "To get the 700 million ($10.5 billion) of extra revenue the Treasury says, it must have been anticipating exploration expenditures at the very highest recent levels--on the order of about 1.6 billion/year over 3 years.

"The industry tells us these levels would not have been maintained even without the budget changes. It would have explored less in the next 3 years, so our projection is that the government will raise no extra revenue during that period."

Arthur Andersen said the effect of the reduction in PRT and abolition of PRT on new fields will generate additional cash flow to the industry of 1.7 billion ($2.55 billion) during the next 3 years.

SHELL/ESSO PROGRAM

Chris Fay, managing director of Shell U.K. Exploration & Production, the Shell/Esso U.K. plc upstream joint venture, said reduction in PRT will improve the cash flow from producing fields, which is vital as an oil province reaches maturity.

The extra revenue will lengthen the life of older fields, and this will create jobs long term. Exploration and appraisal work will decline, although development drilling will increase.

Before the budget announcement, Shell/Esso said it planned to spend about 472 billion/year on the U.K. Continental Shelf during the next 5 years. More than half of this was earmarked for development.

"If anything, we will spend slightly more on development in light of the budget," Fay said.

Shell/Esso may delay one or two wells but intends to bring some field development projects forward. The company drilled 27 E&A wells last year and plans to spud 18 this year and 18 in 1994, "...unchanged by the budget."

In the southern North Sea, Shell/Esso plans to bring on several small to medium gas fields in the next 3 years, which were considered marginal before the budget.

In the central North Sea, the combine intends to speed development plans for a number of oil fields, using floating production systems. These include the 40-80 million bbl Mallard and 30 million bbl Teal oil fields.

Floating production developments valued at 400 million ($600 million) in total are envisaged for Mallard and Teal. First oil has been scheduled for 1995, whereas before the budget a start-up target had not been assigned.

In the northern North Sea, Fay said, Shell[Esso now has added incentive to keep Cormorant, Dunlin, and Brent fields on stream. Last month the company applied for development approval for a southern extension of Brent field and plans to speed development of other Brent satellites (OGJ, Apr. 12, p. 28).

"Lots of taxable barrels will come from the North Sea which would not have been recovered before the tax reform," Fay said. "The reforms give oil companies a breather, encouraging companies to develop what they have to the benefit of the companies and the taxpayer."