UKOOA Warns That Tax Hit Would Prompt North Sea Exodus

Any change to the North Sea tax regime would risk an exodus of investment, equipment and manpower from the UK resulting in the unraveling of the good work of Government and industry in recent years, members of the Scottish Council for Development and Industry (SCDI) were told in Aberdeen on November 8th.

Steve Harris, of the UK Offshore Operators Association, is responding to speculation that the Treasury might look to raise revenues by targeting North Sea oil and gas producers. He warns that such a move would dissuade new companies from entering the mature North Sea basin, curtail investment, curb export potential and hit jobs. It would also undermine the many achievements of PILOT, the reforming partnership between Government and the industry which has transformed industry practices in the last five years, he says.

Malcolm Webb, UKOOAs chief executive, adds: "The industry in the UK is facing fierce competitive pressure for financial, human and physical resources, such as drilling rigs and plant from all around the world. It is fighting off a strong pull on capital, equipment and personnel from other oil and gas provinces, which has been heightened by the impact of hurricane Katrina. A tax hit now would see resource flight to the Gulf of Mexico, Africa, the Caspian and other sectors of the North Sea.

"This would almost certainly result in a failure to maximize the recovery of the UKs indigenous reserves of oil and gas, with severe consequences for UK security of energy supply, balance of trade and future tax receipts.

"Every £1 billion drop in North Sea investment means a quarter of a billion barrels of UK oil and gas left un-recovered in the ground, at a time when we should be doing all we can to maximize the production of our reserves.

"Furthermore, a new and important business in the export of oilfield goods and services is developing in the UK. We conservatively estimate it to now be worth £6 billion per annum and believe it has the potential to earn the country major revenues even after indigenous oil and gas production has ended.

"However, this emerging business needs a secure home base from which to grow. Any damage to that home base now would severely prejudice this important opportunity for UK exports.

"The country would pay dearly in the long-term for what would be, at best, a short term gain," he said.

The PILOT reforms, giving investors better access to exploration and development opportunities, have coincided with a period of rising oil prices, leading to a strong recovery in UK North Sea activity over the past 18 months.

Capital investment this year could exceed £4.5 billion, up from £3.3 billion in 2004. Exploration and appraisal drilling has nearly doubled since 2002 and should be around 80 wells this year; development drilling has increased for the first time since 2001 and should be around 230 wells in 2005. Total spend this year (exploration, appraisal, capital and operational) is at an all time record of more than £10 billion.

"The high oil prices are already giving the Treasury a windfall. The industry's tax payments are now at levels that no one foresaw," says Steve Harris. "They are expected to be above £10 billion this year, double last years' contribution and three times that forecast in 2003. The Treasury stands to gain many billions more, provided we can sustain investment in the North Sea at current levels.

"We do not believe that the Government will want to risk all this."

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 - UKOOA Warns That Tax Hit Would Prompt North Sea Exodus (Nov 14)