Despite new tax measures, decommissioning key to UKCS activity, says analyst

Offshore staff

LONDONDouglas-Westwood (DW) has analyzed recent tax actions taken by the UK government and weighed in on a service area it felt was likely to stay active for the foreseeable future.

Earlier this month, the government effectively abolished the UK’s Petroleum Revenue Tax (PRT) and reduced the supplementary charge tax from 20% to 10%. The analyst firm noted that the government’s aim is to encourage investment in infrastructure and new developments, as well as support production from existing fields in the UK continental shelf (UKCS), and that the measure could result in a tax break of around £1 billion ($1.4 billion) over the coming five years.  

However, DW speculated that the motion could be “too little too late.” With production in decline, the UK oil and gas industry has been severely impacted by a longer than anticipated suppression in oil price. The note said that this has led to widespread job cuts, reducing the workforce by approximately 26% (65,000 jobs lost).

“Ultimately, a change in taxation regime is not going to dramatically alter the fate of production operations within the North Sea,” the analyst continued. “What is required is substantially increased investment; this is only likely to occur as a function of higher oil prices. 

“Operators also require support in ensuring that production infrastructure is maintained – and accessible – to allow future additions through satellite developments. Widespread decommissioning could put this under threat, potentially limiting future field activities and ultimate recovery in the UKCS.”   

The current downturn does provide some upside for service providers, DW said. The UK is expected to have the largest decommissioning opportunity in the coming decade. The company’s new North Sea Decommissioning Market Forecast 2016-2040 predicts that $44-$50 billion will be spent on decommissioning activity on the UKCS. This is more than half of all forecast decommissioning expenditure in the report which also considers Denmark, Germany, and Norway.

The UK has the largest volume of installed infrastructure, as well as the oldest platforms. DW believes that decommissioning could play a key role in ensuring ongoing activity for service companies within the North Sea.

Ultimately, DW said that the challenges posed to those working on the UKCS “will not be solved by broad-brush fiscal policy from Westminster.

“The need for the industry to work together to find collaborative solutions has never been greater,” the note ended.


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