Whoever wins the UK general election, and whether that victory is hung or clear-cut, the new administration will be looking for large sums of money wherever they may be available.
However, it would be very foolish of them to cast their eyes once again in the direction of the North Sea because the equation between taxation, investment and revenues is a lot more delicate than many politicians believe.
When tax was increased in the 2002 Budget, nobody in the DTI – and I do mean nobody – had any forewarning, presumably on the grounds that they might have objected. It was a revenue-raising exercise, pure and simple, which no inconvenient arguments were to get in the way of.
There are too many imponderables for anyone to say with certainty that the Government’s “take” since then would have been greater or less in a more favourable fiscal climate. But there is one statistic that should serve as a warning.
A decade ago, when various measures were put in place by the industry and Government working together through PILOT, a target was set of 3million barrels oil equivalent per day from the UKCS through to 2010. That target has not been met; this year, we might reach 2.5million.
There is no simple, single explanation of this, but the certainty is that taxation policy does have a significant bearing, and that cuts two ways. While the general level of investment is currently low, there are real bright spots – particularly West of Shetland – where the Government has granted special fiscal terms.
The incoming Government should learn that lesson – more investment leads to higher revenues over a long period. It is now pretty well established that the offshore industry was not crying wolf, in recent years at least, when it warned against the impact of higher taxes.
Indeed, it would be sensible for the new Government – even if it is rehash of the old one – to send out a strong signal to the industry by accelerating re-negotiation of Petroleum Revenue Tax, which currently takes the overall burden up to 75%. PRT, of course, applies only to fields which were first developed before 1993.
The original rationale of PRT when it was introduced in 1975 was to give the oil companies a very cheap ride initially to get investment under way, with higher than normal levels of taxation once the fields were proven and producing. That was a sensible enough deal and the Treasury has long since had its pound of flesh.
But these fields, if their lives are to be extended through incremental developments, need new investment, and it simply isn’t happening at present because of that 75% tax disincentive.
Guru petroleum economist Professor Alex Kemp has argued for the abolition of PRT linked to relief for decommissioning, and the Treasury has expressed interest in this idea. It should be pursued urgently as a route to revitalising the venerable fields.
On the licensing side, a lot of good work has been done over the past decade, often through PILOT, to ensure that more potential discoveries are available to smaller, nimbler companies. These included the Fallow Fields Initiative, Promote Licences, the Stewardship Initiative, and so on. Each is capable of producing results and should be given more muscle.
One of the biggest inhibiting factors on new projects is the time it takes to negotiate access to existing infrastructure. This is surely something that an energetic incoming minister could take an interest in.
Already, the Government has taken the power to intervene if agreement cannot be reached between the owners and potential users of the pipelines. But that can still take years.
It is really an accident of history that this very significant negotiation is still left to two private parties when there is a clear public interest at stake. So it would be sensible to go one step further and make it a regulated system which cannot be obstructed for purely commercial reasons. That would send out a strong signal of really meaning business in order to ensure that the North Sea’s resources are fully exploited.
A lot of good work has been done on modelling the relationships between taxation, production and yields to Government. All of the evidence points in the same direction – that the country’s interests are best served by encouraging lots of new, smaller developments rather than simply by milking those that already exist.
That is the way the North Sea has been going, and must continue to go. The majors have voted with their feet and are gradually moving on to other, more promising territories. But with oil at $70-80 a barrel, there are plenty of opportunities left in the UK sector of the North Sea. As in the past, Government – of whatever complexion – and industry should work together to maximise them.
And – as not always in the past – the Treasury should seek advice before assuming that, in anything but the shortest of terms, higher taxation means more money.
Brian Wilson is a former UK energy minister
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