Members of the UK industry association Oil & Gas UK have called for an emergency meeting of PILOT, the UK government industry forum established to help maximize recovery from the UK Continental Shelf (UKCS), and a meeting with the UK Treasury to discuss the increase in the supplementary charge on profits from UK oil and gas production to 32 percent from 20 percent.
The unexpected tax hike announced by the UK government last week appears to have been constructed hurriedly without rigorous analysis of its implications and has damaged investors' confidence in the UK as a stable destination for their capital, said Malcolm Webb, chief executive of UK energy industry association Oil & Gas UK.
"The move has made companies re-think their plans to step up investment in the next few years, jeopardizing tens of thousands of jobs as well as indigenous oil and gas production which will likely lead to an increase in the import of these fuels. The lost trust will take a very long time to rebuild," Webb said.
The proposed tax changes have prompted Norway-based Statoil to put investment plans on hold for the Marine and Bressay heavy oil fields in the UK North Sea, and delay the award of the front end engineering and design (FEED) contract, said Statoil spokesperson Bard Glad Pedersen.
Mariner and Bressay were discovered in 1977 and 1981. The Mariner Field is located on the East Shetland Platform of the UK North Sea approximately 150 km east of the Shetland Isles with Bressay is 55 km north of Mariner.
Mariner and Bressay hold several hundreds million barrels of recoverable oil; WoodMac estimates the reserves to 640 million barrels for the two fields combined. The development of these two fields will include more than US$10 billion of investments and lay the foundation for substantial value creation regionally and for the UK.
Statoil entered the projects in 2007 with the ambition of using its heavy oil experience from the Norwegian Continental Shelf to develop these fields.
The proposed tax changes impact project economics significantly and represent a substantial set back. Two years ago, the authorities introduced field allowances to incentivize development of heavy oil projects such as Mariner and Bressay. The negative impact from the proposed tax change more than outweighs the field allowances.
"We hope to establish a dialogue with the UK authorities to discuss how to enable development of these important but challenging projects," said Pedersen.
Other media reports quoted Premier Oil Plc officials as saying the tax hike was not likely to have a significant impact on the company’s earnings over the next four years, as the tax hike’s effects would be mitigated by tax allowances from a 2009 acquisition.
EnCore Chief Executive Officer Alan Booth said on Monday, "While unexpected tax changes are never welcome, given the current state of the nation's finances, one can at least rationalize the desire to raise revenues from fields that have already paid back their risked investments during a time of very high oil prices. However, failure to encourage the discovery of new fields as well as the development of newer, smaller and difficult fields on fair and predictable fiscal terms is in no one's interest.
"Undeveloped and undiscovered oil and gas pays no taxes, creates and sustains no employment and a slowdown in UKCS activity will simply increase the UK's reliance on imported oil and gas from less politically stable, if not as fiscally unpredictable, parts of the globe.
"I welcome the Government's indication that it is prepared to discuss with the industry the enhancement and broadening of the recently introduced Field Allowances which I believe, if properly structured, could mitigate the effects of these changes and continue to incentivize those companies who wish to continue to invest in finding and developing the UK's offshore natural resources."
Ithaca Energy reported last week that it would continue with its development of the Athena field and the core Stella hub, and a review of the company's portfolio of existing appraisal and development opportunities will be conducted as details of the draft tax change legislation emerge.
Ithaca said the company's revenue from future field developments with approximately less than 25 million BOE, such as Athena, will continue to benefit from the Small Field Allowance sheltering up to US $120 million of field profits from the 32 percent supplementary change.
The company also said it tax losses pool of US $215 million and predicted future capital expenditure program indicates no taxes are likely to be payable for at least the next five years. Ithaca also has limited decommissioning liabilities, minimizing its exposure to the announced differential tax treatment of decommissioning costs.
In 2010, the UK produced 850 million barrels of oil and gas equivalent (BOE) or 2.3 million BOE/d. Oil & Gas UK believes there could be up to 24 billion barrels of oil and gas still to recover from the UKCS.
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