On Tuesday 15 July HM Treasury issued a consultation document for interested parties involved in the oil and gas sector.  This comes in the wake of the Wood Review which involved broader aspects of concern for the sustainability and development of the sector.  It is estimated that there are approximately 40 years of production still left in the UK continental shelf. The aim of this consultation is therefore to invite opinions from interested parties on the economics of the remaining reserves, the encouragement of investment and the delivery of a fair return for government revenue.  The consultation process asks for comments from interested parties by 3 October with interim conclusions to be published with the Chancellor's autumn statement.

Background

The production from the UK continental shelf is now at a mature stage, with the result that further oil production is becoming more technically challenging.  Since production began in the 1960s 42 billion barrels of oil equivalent (boe) has been produced, and estimates suggest that between 11 and 21 billion boe remain.  Production has declined considerably in the last four years but is now stabilising.  The next phase of development will require exploration and development in more difficult areas of the UK continental shelf (eg. West of Shetland), which in itself presents the following challenges:

  • Attracting continued investment to support exploration and development of newer (and generally smaller) fields;
  • Re-investment in the current infrastructure so as to extend the efficiency and economic life of those currently producing fields;
  • Being competitive with other newer basins which may be technically and commercially easier to exploit.

HM Treasury understands and appreciates the impact of the UK taxation system in this context.

Interested Parties

Comments are invited from the following categories of participant in the oil and gas industry:

  • Members of the oil and gas industry;
  • Companies involved in the upstream supply chain;
  • Providers of finance to the industry; and
  • NGOs with an interest in the future of the industry.

For focussed discussions on relevant aspects of the UK tax system there are to be four working groups concentrating on the following points:

  • Fiscal structure and principles;
  • Petroleum revenue tax ("PRT");
  • Exploration, appraisal and new development; and
  • Asset stewardship.

HM Treasury Questions

In common with other consultations, the document asks for specific comment on areas where HM Treasury is considering policy and the suitability of either current rules or proposed reforms.

These questions are split into different topics.  The first series is essentially about the projected economics of UK continental shelf activity.  The essential nature of this series of questions is to explore how the fiscal regime can support the economics of maximising recovery from the North Sea basin, as well as analysing how the UK tax regime can ensure the most cost effective decommissioning.

The second series of questions concerns the exposure of the industry to commodity price variation and questions whether changes to the tax regime could help to mitigate risks arising from such exposure.

The competitiveness of the UK continental shelf is an area of specific concern to the government.  As a result, evidence is requested from industry as to how the fiscal system contributes to perceived uncompetitiveness.  Feedback on more attractive investment options is also sought.

The simplification of tax rules is also considered.  HM Treasury therefore invites feedback on the advantages and disadvantages of recent allowances which have been introduced.  Also, the future of PRT is considered.  Although this was abolished for new fields from 1993, there continues to be a legacy of some 100 fields still subject to this tax.

Opportunities

Given the maturity of the UK continental shelf and the associated decline in production in recent years, this consultation (along with the Wood Review) provides a welcome opportunity to ally the economics of the sector with a more competitive and suitable tax regime.  The types of exploration and production which would come from new investment are likely to be of a nature which is more technically challenging and the UK continental shelf would be one of the first major basins worldwide to enter into a final production phase.  Therefore, new investment into the UK could lead to this country being a leader in developing the skills and assets of the sector for the exploitation of mature basins.