Oil & Gas UK calls for government action ahead of budget

Offshore staff

LONDON Oil & Gas UK has welcomed the decision by Britain’s Oil and Gas Authority to host a competition to analyze data from new frontier UK geophysical surveys.

WesternGeco acquired both datasets in the Rockall Trough off western Scotland and in the Mid-North Sea High.

The Exploration License competition is designed to help re-evaluate how to use data more efficiently to unlock Britain’s remaining offshore exploration targets.

Oil & Gas UK has also issued proposals for tax changes in Chancellor George Osborne’s annual budget this week, which it claims could boost both the industry’s competitiveness and investors’ confidence in the UK continental shelf (UKCS).

Tax reforms are urgently needed, the association claims, following new forecasts which suggest that in the current price and business environment, more than 1 Bbbl of UK oil and gas are no longer viable to extract.

Mike Tholen, Oil & Gas UK’s economics director, said: “In such a mature basin like the UKCS where special attention and expenditure must be directed at maintaining the integrity of oil and gas infrastructure, we know that strong and sustained investment does translate into higher production.

“The 10% increase in production in 2015, confirmed last week by the Oil and Gas Authority, is a direct result of significant annual capital expenditure in the five years to 2014.

“With investment approvals likely to fall to less than £1 billion [$1.44 billion] this year from a typical £8 billion [$11.5 billion] annually over the last five years, there is a real risk that fields due to cease production in the next five years will simply not be replaced by new projects…As a result, domestic oil and gas production is forecast to decline sharply beyond the end of this decade.”

The UK oil and gas sector is targeting a 40% improvement in its efficiency and average unit operating cost compared with two years ago, but substantive tax reform is also needed to drive activity and send a signal to global investors that the UK remains an attractive business option, the association claimed.

Tholen said: “The industry currently pays 50% tax on production profits – or 67.5% for older fields – and we are calling for a permanent cut of 20% and the removal of Petroleum Revenue Tax. These rate changes, coupled with the existing first year capital allowances, are strongly aligned with HM Treasury’s ‘Driving Investment’ plan for fiscal reform.

“The incentivizing effect on investment and production in the long-term should render it of minimal cost to government.”

Unlocking the late-life asset market is vital to maximize the UK’s oil and gas recovery, Tholen added, as asset transfers extend the life of important hub assets and defer cessation of production. This can be achieved, he said, via measures such as enabling decommissioning tax relief to transfer with the sale of an asset and ensuring tax relief can be accessed by the vendor where the decommissioning liability is retained, all at no cost to the government.

“Exploration, which currently sits at an all-time low, should be encouraged by permanent removal of special taxes from discoveries made over the next five years. Improving the effectiveness of the Investment Allowance for assets already discovered would stimulate activity in the short term and attract fresh investment.

“Financial difficulties faced by operators and contractors alike during this severe downturn, which are in some cases threatening the continued viability of companies risking jobs and future innovation, could be eased with the introduction of a government-backed Loan Guarantee scheme,” Tholen added.


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