Earlier this year, Endeavour International became the first operator to ask the Department of Energy and Climate Change (DECC) to rule on a UK North Sea pipeline access price disagreement. The target was Canadian group Nexen.
William Transier, Endeavour’s CEO, accused Nexen – operator of the Scott field – of setting unreasonably high rates for transporting gas from the proposed Rochelle project through the Scott infrastructure.
Industry sources have said recent charges for the use of some North Sea pipelines has been as high as $10 per barrel of oil equivalent, plus operating costs – a price that is said to be crippling for many small companies.
In a bid to bring clarity to tariff determination for third-party access, Professor Alex Kemp of Aberdeen University, together with colleague Linda Stephen, has studied the complex issues associated with third parties seeking to utilising spare ullage.
There is no one simple solution with regard to the level companies charge for access, but Kemp and Stephen appear clear on one thing – the Treasury’s tax take should be cut, particular the 20% supplementary charge (SC) imposed by Labour under the Blair administration.
“There is a case for abolishing supplementary charge on new tariff contracts. Reducing the tax burden on tariff incomes could result in lower tariffs. This was recognised a few years ago when petroleum revenue tax was abolished for new tariff contracts,” they say.
Kemp and Stephen remind that the original abolition of PRT (petroleum revenue tax) on tariff incomes relating to new contracts was introduced to enhance the competitiveness of the UKCS generally, including the ability to contract for gas imports from Norway through British infrastructure.
Currently, the tariff income is taxed at 50% corporation tax (CT), plus the 20% charge.
“The present situation in the UKCS should be seen in this context,” say Kemp and Stephen.
“There can be no doubt that corporation tax should apply to tariff incomes, along with all other sources of corporate income, and that this should be acknowledged in tariff determination. But the application of SC to tariff incomes and its inclusion in cost-related tariff determination is very questionable.
“It could mean that tariffs are higher than they otherwise would be and result in economic recovery of oil and gas from potential user fields being reduced.
“The increased operating costs for user fields could accelerate the economic cut-off from such fields, or even cause the non-development of marginal fields.
“In the above circumstances, there is a case on economic efficiency grounds for removing the SC on tariff incomes where the tariff is determined on a cost-related basis.
“It is, arguably, inconsistent to determine tariffs in this manner while levying SC on the income in question. Given that tariff determination on a cost-related basis is just starting, the appropriate mechanism could be to remove SC from new third-party contracts from a specified date.
“This should help to incentivise third-party infrastructure agreements and encourage maximum economic recovery from the UKCS.”
Kemp and Stephen warn that access to infrastructure is an important subject in the current state of development of the UKCS, where the twin objectives of encouraging new field developments and maximising the use of the existing infrastructure of pipelines, processing platforms and terminals play major roles in facilitating maximum economic recovery from this now very mature energy province and where typical small new oil and gas discoveries would be rendered uneconomic if new stand-alone infrastructure had to be developed.
“While economic principles indicate that discriminatory pricing by infrastructure owners across third-party users based on their willingness to pay can lead to maximum economic development of new fields and utilisation of the infrastructure, it is inconsistent with the current rules of the Infrastructure Code of Practice (ICOP) and the guidance given by the DECC when (as now) the latter is asked to make a tariff determination. The provisions of both state that tariffs shall be non-discriminatory.”
They point out that, currently, the typical situation for much of the pipeline infrastructure in the UKCS is that investment costs have been incurred and ullage is available for third-party use. In these circumstances, marginal (or incremental) costs for operating the infrastructure will be below average costs.
“Given the non-discrimination requirement, tariff determination for access based on average cost pricing is appropriate,” say Kemp and Stephen.
“If marginal cost pricing were employed, the infrastructure would operate at a loss and would be prematurely closed. In turn, this would reduce the number of new field developments and overall economic recovery from the UKCS.
“In situations where new infrastructure has to be provided, or investment has to be undertaken in existing pipelines or processing facilities to reinforce integrity or augment capacity for third-party use, the incremental investment costs need to be reflected in cost-related tariffs, otherwise the enhanced infrastructure will not be provided.
“Currently, tariff incomes are subject to corporation tax at 30% and supplementary charge at 20%.
“In a situation where tariffs are determined on a cost-reflective basis, as is proposed in the DECC guidance, it is arguable that, while normal corporation tax should apply, it is inconsistent to levy the supplementary charge on such cost-reflective incomes. These should contain no super-profit.”