Wood Mackenzie has completed its initial assessment of the four changes to the UK Continental Shelf (UKCS) upstream fiscal regime that the UK Government announced in the 2015 Budget.
Wood Mackenzie's upstream research concludes that this is a much needed refurbishment of the economic regime, reflecting the maturity of the UKCS basin and that the changes signify an important response to industry pressure, lower oil prices and higher costs.
Ms. Mhairidh Evans, UK Upstream Senior Research Analyst for Wood Mackenzie comments: "The announcement was largely in line with what we were expecting and will be widely welcomed by industry. The Investment Allowance simplifies and widens the scope of the current Value Allowance system. Cuts in the headline rates will reduce the marginal tax rate for most onstream and all new fields from 60% to 50%.
"For older fields also liable for PRT, this reduction will be 80% to 67.5%. We estimate that 50 of the 328 onstream fields in the UKCS pay PRT. Although this only impacts about 15% of fields, this is the lowest rate of PRT since the 1970s and will increase the share of field profits by 62.5%," adds Ms. Evans.
Ms. Evans summarises; "While the announcement is beneficial for onstream fields and already-discovered resources, there will be disappointment that more hasn't been done to revive exploration. The effect of the Investment Allowance is unlikely to extend to opening new plays, and £20 million will be used up quickly on surveys in frontier areas. Further work will still be required to address the long-term challenges of the UK's high-cost operating environment and dry project pipeline."
The announced changes are:
- Reduction in Supplementary Charge Tax (SCT) from 30% to 20%
- Reduction in Petroleum Revenue Tax (PRT) from 50% to 35%
- Introduction of a basin-wide Investment Allowance, allowing exemption of 62.5% of new investment expenditure from SCT
- £20 million support in 2015-16 for surveys of under-explored areas
Adapted from press release by Joseph Green