A leading oil and gas expert said last night that tax breaks could significantly boost new field development across the UK North Sea.
Alex Kemp, professor of petroleum economics at Aberdeen University, said his latest study – co-authored by colleague Linda Stephen – into links between development activity and taxation looked at a wide range of scenarios.
A total of 18 new oil and gas fields in different areas of the North Sea were modelled, with development and operating costs adjusted to reflect recent cost-cutting by the industry.
Each was subjected to three different pricing assumptions – $30 for every barrel of oil and 30p per gas therm, $50 and 40p, and $60 and 45p.
Several different tax proposals were also thrown into the mix.
These included sticking with the current regime, introducing greater flexibility for both the industry’s supplementary charge (SC), investment allowance (IA) and the way IA interest is applied, a cut in the headline rate of SC and various combinations of them all.
The duo calculated pre-tax and after-tax returns for all the fields under the various price and tax conditions, and also looked at the likely impact of reducing corporation tax (CT).
Professor Kemp said: “The detailed results of this study are complex, reflecting the varied returns to the projects before tax and the complexities of the tax arrangements.
“At $30 (oil) and 30p (gas) prices, the great majority of projects are found to be uneconomic before tax. The tax system shares in the losses through the various allowances.”
He added: “The conclusions to be drawn from the detailed analysis are that there are many marginal and sub-marginal new development projects in the UKCS (UK Continental Shelf) under likely oil and gas price scenarios, cost conditions, and field sizes.
“The evidence from the modelling is that a combination of headline tax rate reductions plus immediate relief for the IA plus interest on unused IA can have a significant positive effect on investment in new fields.
“Immediate relief for the IA and interest on unused IA are progressive in their effects.
“That is, they produce relatively more benefits to marginal projects or those of relatively low profitability, than to more profitable ones.”
Prof Kemp said a cut in the rate of CT would be “more powerful” than an equivalent reduction in the SC rate.
He added: “A package incorporating lower CT rate, immediate relief for IA, and interest on unused IA is thus recommended.”