UK tax change could dampen transactions

Offshore staff

ABERDEEN, UK -- The UK government’s decision to raise supplementary tax on North Sea oil and gas producers this week continues to draw criticism from analysts.

The level will increase from 20-32%, resulting in a 62% marginal tax rate. This will impact profitability of operations and likely hamper M&A activity in the sector, according to KPMG.

Anthony Lobo, Oil & Gas Transactions partner at KPMG, said: “In marginal gas fields, in particular, many producers may pack up and consider importing the gas to supply long term contracts; either via liquefied natural gas (LNG) or the Interconnector (the European natural gas pipeline between Belgium and eastern England).

“Not only will the increase in tax discourage junior companies from exploring, it will also put a big dent in the value of assets for those majors who are considering selling their North Sea interests. This may well bring to a halt many of the sales processes that have started over the past year.”

Jim Hannon, director at Hannon Westwood, said: “The effect of the government’s changes in the North Sea will be costly for small emerging oil companies. We are already seeing their share prices tumble as the investment market downgrades the value of future new oil production.

“What this means is that we are undermining the fabric of the next wave of capital investment from a growing band of small companies that have spent much of the past ten years highlighting and securing a major part of our future UK offshore oil and gas potential production.”

However, one junior independent, Calgary-based Ithaca Energy, reacted more cautiously to the changes, pointing out that measures were in place to offset the impact. It plans to persevere with its developments of the Athena field and the Stella hub in the central North Sea.

Ithaca says its tax losses pool at the start of 2011 was around $215 million. This pool, combined with its future capital expenditure program, suggests that no taxes are likely to be payable for at least the next five years.

The company says revenues from its future UK field developments with reserves below 25 MMboe, such as the Athena field in the central North Sea, will continue to benefit from the Small Field Allowance. This shelters up to $120 million of field profits from the 32% supplementary charge.

Athena has limited decommissioning liabilities, which also minimizes its exposure to the announced differential tax treatment of decommissioning costs.

However, the company will review its existing appraisal and development opportunities as more details of the draft tax change legislation emerge.


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