TAX REFORM TO SHOW MIXED EFFECT ON U.K. NORTH SEA REVENUES

Petroleum revenue tax (PRT) changes announced in U.K. Chancellor Norman Lamont's annual budget will increase revenue from the North Sea in the short term but only by L115 million ($172.5 million) rather than the L700 million ($1.05 billion) estimated by the government. British Petroleum plc will be the main beneficiary of PRT reform with an increase in short term cash flow of a little more than L100 million ($150 million)/year. But the new system is unsound and liable to change again.

April 19, 1993

3 min read

British Petroleum plc will be the main beneficiary of PRT reform with an increase in short term cash flow of a little more than L100 million ($150 million)/year. But the new system is unsound and liable to change again.

Those are conclusions of Wood Mackenzie Consultants Ltd., Edinburgh, which reports a total of six outright winners, six companies that will lose in the short term but win in the long run, and 17 losers from PRT reform.

Lamont reduced PRT on producing fields to 50% from 75% and abolished it for future developments. However, he also killed PRT allowances for exploration and appraisal drilling that previously could be claimed against profits from producing fields (OGJ, Mar. 29, p. 33).

"Future exploration and appraisal levels in the North Sea will be the major casualty of the proposed tax changes, along with drilling contractors and service companies," Wood Mackenzie said.

"The number of wells drilled could easily fall to below 100/year. Even the winners under the proposals may reduce U.K. drilling activity in order to focus on overseas opportunities."

Profits from large, mature fields are improved by the reforms, while future developments are mostly too small to have been liable for PRT anyway.

BIG FIELDS, BIG COMPANIES

Predicted cumulative cash flow during 1993-96 from Brent field, operated by Shell U.K. Exploration & Production, was boosted from L571 million ($857 million) to L1.161 billion ($1.742 billion) by the budget.

BP Exploration Operating Co. Ltd. saw Forties field's predicted cumulative cash flow during 1993-96 rise from L952 million ($1.428 billion) to L1.457 billion ($2.186 billion) through tax reform.

Wood Mackenzie analyzed the tax reform effect on 72 companies with interests on the U.K. continental shelf, identifying the main gainers as companies that had high PRT payments relative to exploration and appraisal spending.

Shell U.K. Ltd. and Esso U.K. plc, through Shell U.K. Exploration & Production, are among 43 companies unaffected on balance by the reform. Improved economics in Brent and other large fields will be offset by exploration and appraisal spending.

Companies that lost out short term but gained long term are those that will experience a cash flow drop, counterbalanced by an increase in commercial net value. The main losers will be those with high exploration and appraisal levels relative to PRT payments.

The analyst calculated that, based on the government's assumption of an $18/bbl oil price and L1.5 billion ($2.25 billion)/year exploration and appraisal spending, the U.K. Treasury will receive 47560 million ($840 million) to the end of the 1995-96 financial year as opposed to L700 million ($1.05 billion).

However, based on $19/bbl and El.3 billion ($1.95 billion)/year exploration and appraisal outlays, only L115 million ($172.5 million) will be retained by Treasury during the same period, Wood Mackenzie said.

"For a mature province having to compete against a number of areas worldwide, the North Sea has done well," the fin-n said. "To a large part, this has been due to the political, fiscal, and regulatory stability of the North Sea -a perception now severely dented.

"The proposed changes to the fiscal regime make it structurally unsound and thus liable to change again."