While positive measures have been taken to attract investment in the UK’s exploration and production (E&P) sector, low oil prices and the country’s high tax burden mean that more significant changes are required to make new developments commercially viable, says an analyst with research and consulting firm GlobalData.
During the annual Autumn Statement, UK Chancellor George Osborne announced a supplementary charge reduction, which will decrease the overall tax rate on the country’s E&P sector from 62% to 60%, effective from 1 January 2015.
According to Will Scargill, Fiscal Analyst for GlobalData, this move will improve the sector’s profitability to some extent, but the simultaneous removal of the price-based trigger mechanism, which could have reduced the total tax rate by 12%, will not be considered a beneficial trade-off by E&P investors if the oil price does not rebound from its current levels.
“The 2% supplementary charge reduction is unlikely to have a significant impact on investment decisions, as the resultant reduction in fiscal take is limited and the break-even oil price for a typical North Sea field is decreased by less than US$1 per barrel,” says Scargill. “However, even reducing the charge to 20% would not push the break-even price below $70 per barrel, suggesting that if the oil price does not rebound in the medium to long term, more substantial changes will be required to allow companies to invest in new field developments.”
The analyst adds that the new cluster allowance will massively benefit companies with qualifying projects by reducing their tax burden. Nevertheless, such projects are few, with the Culzean gas field being the only sanctioned development eligible for the allowance.
“Overall, the UK is sending positive signs to E&P firms, but high operational costs mean that the recent tax amendments are no game-changer for the investment climate. Even if oil prices improve, the UK Continental Shelf is becoming less competitive as it matures and will require more attractive fiscal incentives,” says Scargill. “Without investment in extending the lives of producing fields, existing infrastructure will be decommissioned earlier. This will have the knock-on effect of reducing the commercial viability of smaller fields, which depend on such infrastructure, leaving resources below ground and ultimately resulting in a decline in sector size and associated tax receipts.”