"Marginal" Improvement - The Chancellor's Changes
In his budget speech delivered today the Chancellor of the Exchequer announced the abolition of Petroleum Revenue Tax (PRT) on new tariff income.
Fields developed pre-1993 are currently liable for PRT (at a rate of 50%) on tariffs received for the use of their associated pipelines and platforms from third party business. As a result of the changes, tariffs received from future new developments will not be liable to PRT.
Assisting Marginal Fields
The Treasury has affected the change in the expectation that the benefits of relief from PRT are passed on to new field developments in the form of lower tariffs. Tariffs can make up a significant proportion of field operating costs (for example two thirds of opex in the Howe Probable Development). By lowering future tariffs by up to 50%, it is expected that the economics of some marginal fields will improve sufficiently for their development to occur.
Impact on Government Revenue
Our Probable Developments portfolio represents those fields which we expect to commence production in the next four years and are economic under the pre-budget regime. We estimate that the Net Present Value (NPV) of Government Take will decrease by some £200 million as result of the change in the treatment of tariffs from these fields, assuming a resulting decrease in tariffs. This compares to a total NPV of Government Take of more than £35 billion from currently commercial fields in the UK. The Treasury will be hoping that the further revenues from the additional fields which now prove to be economic as a result of the change will offset this loss. This positive incremental change in the fiscal terms is in contrast to last year’s significant tax increase. The effective increase in Corporation Tax from 30% to 40% re-allocated an estimate £5.1 billion in NPV from Companies to the Treasury. The subsequent abolition of Royalty is estimated to have returned some £790 million of this value to the companies.
Will the benefits be passed on to the third party users?
By providing the relief on future tariffs the Treasury is relying on infrastructure owners to pass on this benefit in the form of lower tariffs to potential new field developments. As tariffs are negotiated on a case by case basis, it will be difficult for the Treasury to conclude that this actually occurs.
However, additional throughput is in the interest of the infrastructure owners as it provides additional revenue. These additional volumes will become increasingly important to the pipeline owners as production from the UK declines and significant capacity becomes available in the majority of pipelines.
The change is in line with efforts currently being made by the Government and Industry to encourage activity in the UK sector. These efforts include a wide range of initiatives such as the recently announced Promote License, frequent Licensing Rounds, the UK/Norway co-operation work group and the Fallow Fields initiative.
The changes in the budget are a further incremental step in encouraging future development. Lower tariffs will encourage companies to re-examine the economics of some of the 250 undeveloped discoveries and could potentially improve the economics of new discoveries. This change is expected to lead to the development of some fields that were previously considered uneconomic, increasing the reserves recovered from the UK and encouraging activity in the oil and gas industry.
Finally, the change will also enable lines such as Miller and FLAGS to offer lower tariffs for the potential transportation of Norwegian gas. Whilst a new build line is still expected to go ahead, the possibility of lower tariffs could make these existing lines more competitive in attracting business from across the median line.
Please contact Rhodri Thomas, Consultant - European Energy, for Wood Mckenzie Ltd for further information on Tel 0131 243 4218, Email: email@example.com