Oil & Gas UK Economic Report 2015

52 / 88

ECONOMIC REPORT 2015 52
Promoting Investment
The UKCS has successfully attracted investment for
50 years and significant efforts over the last 18 months to
reshape the basin are expected to help continue this
trend (see Section 5).
The UK has many qualities that make it an attractive
destination for investment capital, such as the availability
of export infrastructure and low geological and project
delivery risk. However, the criterion to rank and measure
investment attractiveness on an international scale has
remained consistently focused on project economics, as
would be expected.
For companies seeking to extract oil and gas,
risk-adjusted, post-tax measures of return, such as
net present value (NPV), expected monetary value
(EMV), along with the well-used capital rationing tool of
profitability index (P/I), will be key considerations.
The UKCS has other benefits that are not easily captured
within these measures of attractiveness, such as low
political risk, a robust view on safety, and an increasingly
simple and stable fiscal regime. Alongside these,
exogenous variables such as price and exchange rate will
clearly have a big impact when distributing capital.
While the sustained fall in commodity prices has tested
the industry globally, it has also provided a heightened
impetus for action across the UKCS. Energised by Sir Ian
Wood’s recommendations in his review of the UKCS18,
industry, the new regulator – OGA – and government
(forming the “tripartite approach” identified by Sir Ian
Wood) have committed to creating an environment
that promotes the principles of Maximising Economic
Recovery from the UKCS (MER UK). This dedication to
change will make the UKCS a more competitive place to
do business.
In Budget 2014, the Chancellor of the Exchequer
announced that the government would review the UK’s
oil and gas fiscal regime “to ensure that it continues to
incentivise economic recovery as the basin matures.”19
Extensive consultation with industry followed,
culminating in the publication in December 2014 of
Driving Investment: a Plan to Reform the Oil and Gas Fiscal
Regime20. Within the review, government recognised that
the tax burden on the oil and gas industry had to fall as
the basin matured; that fiscal policy would be formed
with reference to international fiscal competitiveness;
and that the UKCS would no longer be viewed as merely
a revenue raising asset but for the full economic value it
could deliver, especially exports and the oilfield services
supply chain.
The resulting significant package of fiscal measures
announced in both the spring and summer 2015
Budgets transform the UKCS’ commercial attractiveness,
maximising and rewarding investment at all stages of
the industry life cycle. The reforms will help ensure it
can compete globally for capital as post-tax returns are
enhanced to reflect the risk associated with investments
in the basin.
The Chancellor announced reductions in the SC to
20 per cent from 1 January 2015 and Petroleum Revenue
Tax (PRT) to 35 per cent from 1 January 2016, as well as
the introduction of a new Investment Allowance. The
Investment Allowance, which replaces the old suite of
Field Allowances, is a far simpler support for capital
investment that no longer distorts the allocation of
capital between different projects. It is based on capital
expenditure and generates an allowance of 62.5 pence in
the pound against SC – reducing the headline tax rate on
a portion of production up to the Ring Fence Corporation
Tax (RFCT) at 30 per cent (plus, where applicable, PRT).
See Appendix B for details on the fiscal regime.
Wood Mackenzie estimates the March Budget will
transfer £13 billion of value (NPV10 at 1 January 2015)
from government to industry over time.
Further work will develop the Investment Allowance to
ensure it covers thewide rangeof productivediscretionary
investment that is necessary under MER UK21 and is not
just limited to certain types of activity. For example, the
capital part of long funding lease payments for FPSOs will
accrue the allowance where previously it did not.
Other aspects of UKCS fiscal policy, such as reforms
to the tax handling of exploration, infrastructure
and decommissioning, will be addressed in the latter
half of 2015.
Overall, while the commercial environment on the UKCS
has become more challenging over the past 12 months,
much progress has been made to improve the post-tax
return to the investor. The value of these positive changes
can only bemaximised if significant movement can also be
made to reduce cost and improve efficiency, returning the
basin to a sustainable economic position. This challenge
has never been greater, but the rewards for doing so
are substantial and industry is already taking concerted
action in this area (see Section 5).
18The UKCS Maximising Recovery Review: Final Report is available to download at
19See Budget 2014, p35, at
20See
21See summer Budget 2015 at