WATCHING THE WORLD THE NEXT KNOCK ON THE CHANCELLOR'S DOOR

With David Knott from London British Chancellor Norman Lamont, in the budget announced Mar. 16, justified new taxes on domestic energy and fuel on the need to improve efficiency of fuel use and reduce-carbon dioxide emissions (OGJ, Mar. 22, p. 31). Lamont also proposed changes to the petroleum revenue tax (PRT) regime that would increase the effective cost of drilling a U.K. North Sea wildcat or appraisal well almost fourfold, says an analysis by Wood Mackenzie Consultants Ltd. Edinburgh.

March 29, 1993

3 min read

British Chancellor Norman Lamont, in the budget announced Mar. 16, justified new taxes on domestic energy and fuel on the need to improve efficiency of fuel use and reduce-carbon dioxide emissions (OGJ, Mar. 22, p. 31).

Lamont also proposed changes to the petroleum revenue tax (PRT) regime that would increase the effective cost of drilling a U.K. North Sea wildcat or appraisal well almost fourfold, says an analysis by Wood Mackenzie Consultants Ltd. Edinburgh.

"At a time when drilling levels are already falling, this measure seems bound to reduce the amount of exploration activity in the U.K. North Sea considerably, said the analyst.

The PRT system, which enabled companies to reclaim exploration drilling costs from taxes paid on producing fields, was introduced in 1983. The idea was to persuade companies to invest in U.K. offshore exploration. It worked. As evidence, 1984 saw a 50% rise in exploration drilling compared with 1983.

SHORTFALL

Lamont said drilling concessions under the current tax system denied the treasury 200 million in revenues during 1991-92. However, an oil industry official suggested the deficit is a one time shortfall due to changes arising from the public inquiry into the Piper Alpha platform blast (OGJ, Feb. 22, p. 35).

Although few would challenge Lamont's statement that the tax regime was anachronistic, politicians have said recently they feared high costs in the U.K. would drive oil companies to explore elsewhere.

Michael Heseltine, Lamont's colleague who heads the Department of Trade and Industry (DTI), endorsed a report that said "...a much wider range of opportunities now exists for international oil companies. The U.K. Continental Shelf consequently faces greater competition for oil company investment funds."

ENCOURAGEMENT

One of the main findings in the report cited by DTI said the agency and the oil industry should cooperate to encourage activity on fallow exploration acreage. Quadrupled drilling costs are likely only to encourage thoughts of prospects abroad.

Drilling off the U.K. is in decline. At the peak level in 1990, 224 exploration wells were spudded, falling to 138 in 1992. This year operators have firm plans to drill 116 exploration wells, with another 35 possible (OGJ, Jan. 18, p. 21).

Public outcry forced Lamont Mar. 18 to promise higher government benefit payments to poor families to compensate for the proposed energy tax. The next knock on the chancellor's door may be from oil companies asking for similar treatment.