UK taxes challenge North Sea investors

April 22, 2002
On April 17, Chancellor of the Exchequer Gordon Brown announced a new 10% tax on North Sea oil profits.

On April 17, Chancellor of the Exchequer Gordon Brown announced a new 10% tax on North Sea oil profits. Brown said this tax would be partly offset in the short term by higher allowances on new investment and in the long term by abolishing royalty payments, a 12.5% tax that applies to fields approved for development before March 1982.
The announcement came as a surprise to the industry, which had become accustomed to the UK government's resistance to raising taxes on the offshore industry even in the face of elevated oil prices that raise companies' profits.
The net impact of the recently announced change will be to raise $144.4 million in the year ending March 2003. The next two years will see dramatically increased amounts ? about $653 million in 2004 and $870 million in 2005, the government said. In the wake of this announcement, Talisman Energy of Canada, one of the largest independents with investment in the North Sea, stated that based on current capital expenditure forecasts, the company expects that the short-term impact of the new 10% supplementary tax on North Sea oil and gas profits will be more than offset by the increased capital allowance. Talisman expects that the effect on its cash flow will be positive through the end of 2004. On a non-cash basis, the provision for the future tax liability will be increased once the legislation is enacted. This will result in a charge against income in the 2Q 2002.
The long-term impact is more uncertain as it depends on future investment decisions and the prevailing price environment. Despite these obstacles, Talisman believes the impact of higher taxes could be offset if royalties are abolished as indicated. Talisman will continue to seek further measures to promote the economic recovery of reserves in the UK continental shelf.
The UK Offshore Operators Association (UKOOA), which represents 30 oil and gas exploration and production companies operating in the UK, voiced concern about this development. The organization fears that this move by the British government could undermine investor confidence in the long-term viability of the North Sea. This objective is one the industry has been working with the government to achieve. In its statement, UKOOA said the organization is evaluating the full negative impact of these measures.