Oil & Gas UK Economic Report 2014

Asmentioned, theUOChas also increased from £4.50/boe in 2004 (in 2013 money) to over £17/boe in 2013. Having been relatively well controlled over the first 30 years of production, average UOCs today are close to four times those in 2004 and double those in 2010 (see Figure 27). The result is that the economic life of fields is now shorter than ten years ago in many cases, with a greater threat of reserves being left stranded as fields and infrastructure are prematurely decommissioned. This matter is well addressed in the Wood Review. Crucial to any extraction business is the fiscal and regulatory environment in which it operates. Unlike competing provinces such as the Norwegian and Dutch continental shelves, the UKCS has unfortunately become known for fiscal instability in recent years. Since 2002, the fiscal regime applicable to the UKCS has undergone a series of amendments and become much more complicated. In 2004, shortly after the abolition of royalty (a production tax) and introduction of the SC, the regime was fairly straightforward for investors developing new fields, with a tax rate of 40 per cent. Unexpectedly, however, this was increased to 50 per cent in December 2006 and then again to 62 per cent in March 2011. Alongside these changes, a series of FAs were introduced progressively from 2009 9 . The concept is to help marginal investments

proceed by offering a reduced rate of SC up to the value of the FA, so that a set amount of net income is not subject to the SC. However, all net income remains subject to Corporation Tax, so a minimum of 30 per cent tax is paid at all times by all fields (or 65 per cent in the case of fields subject to Petroleum Revenue Tax (PRT) qualifying for a Brown Field Allowance). Once the value of an FA has been fully used, fields become subject to tax at the usual rates of 62 or 81 per cent. Therefore, although FAs have softened the impact of SC for new and brownfield developments that fit the qualifying criteria, they have added considerable complexity to the higher rate of SC imposed since 2011. It is not surprising that most oil and gas companies would still see the regime of 2004 as more favourable than today’s. Perhaps the most significant change that has occurred since 2004 relates to oil and gas prices which neither industry nor government can influence. The only reason costs have been able to rise to such an extent over the last decade and investment has remained high is because the oil price has nearly trebled over the period from an average of $38/bbl in 2004 ($47/bbl in 2013 money) to $109/bbl in 2013. Similarly, the day-ahead NBP gas price has risen from an average of 24 p/th in 2004 (30 p/th in 2013 money) to 68 p/th in 2013.

9 For full details of the fiscal regime and FAs, please refer to Appendix a.

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ECONOMIC REPORT 2014