More re-engineering of the UKCS fiscal regime may be necessary before a possibly significant slice of known and potential oil & gas resources in the North Sea can be pursued and developed, according to new research.
Otherwise, it is going to be very hard for petroleum companies to make money out of marginal to modest field developments on the UK Continental Shelf at current commodity prices.
This in turn will make it very hard to revitalise this now heavily depleted petroleum province.
Renowned petroleum economist Professor Alex Kemp and long-time research partner Linda Stephen of Aberdeen University have been working with sophisticated modelling tools to try and make sense of what might be possible using a range of pricing scenarios.
Their work suggests that the current Corporation Tax rate of 30% is too high, and that it is “far above the non-North Sea rate”.
And Kemp is due to present their latest findings at the British Institute for Energy Economics at Oxford.
In the paper: How Can the North Sea Oil and Gas Industry be Revitalised?, Kemp & Stephen warn: “From the analysis of the economics of new field investments and exploration in current circumstances in the UKCS it is clear that, at $50 and $60 prices, there are many ‘marginal project investment situations’.
“The tax rate reductions introduced in 2015 and 2016 have two effects. Firstly, they enhance cash flows on existing operations.
“In a situation where the industry as a whole is cash flow negative this is undoubtedly appropriate. But with respect to new field investments the effects are more complex.
“The effect on incentives and returns to investors depends on the combined effects of the reduction in the tax rate on income and the reduction in the rate of relief for the investment costs.
“It was found that, on small fields where the pre-tax returns were quite modest, the reduced rate of relief could be more important than the reduction in the tax rate on income.
“On larger fields and on small fields with higher oil prices, the reduced tax on income is more important than the reduced rate of relief.
“Reductions in the rate of CT (Corporation Tax) rather than SC (Supplementary Charge) were found to be more potent in incentivising new investments. In current circumstances there is a case for reducing the CT rate which, at 30%, is now far above the non-North Sea rate.”
But Kemp & Stephen also warn that tax incentives alone cannot ensure the revitalisation of the UKCS.
“The painful cost reductions currently being implemented are a regrettable necessity,” they state.
“To facilitate the development of the many uneconomic fields, including small pools, technological advances are necessary.
“Expenditure on R&D (research & development) in the fossil fuels segment of the energy sector has been relatively low for a considerable number of years.
“There is a need to enhance this if the recovery factor is to be significantly improved. The new Oil & Gas Technology Centre will hopefully be a major catalyst in this area.”
Kemp & Stephen are clear that the Wood Review’s call for more collaboration among licensees and contractors to enhance economic recovery is necessary.
They point out that this relates to several areas such as third-party access to infrastructure and sharing of information, such as relating to decommissioning.
That said, they also point out that the UK also has competition laws to which all companies have to adhere.
“To facilitate collaboration without falling foul of competition laws can be a challenge,” they say in the paper.
“To reduce uncertainty in this area it is suggested that the OGA (Oil & Gas Authority) and Competition and Markets Authority (CMA) issue joint guidance notes which would clarify what collaborative agreements are consistent with competition laws and which are inconsistent.”
It is also suggested by Kemp & Stephen that the emphasis on objectives could be geared to maximisation of Total Value Added (TVA) from the whole sector including the supply chain, which was advocated two years ago by a Scottish Government’s independent expert’s commission on which Kemp sat, together with Energy’s Dick Winchester and others.
This would include exports from the supply chain. The UK/Scottish supply chain has become increasingly active in overseas markets over the last two decades.
Kemp & Stephen remind that sales to export markets have grown markedly to exceed 53% of the total.
They add: “As the UKCS declines but the world market continues to grow, export activity should also continue to grow. But a continued healthy home market will be necessary to encourage companies to maintain bases in UK.”
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