UK industry sees $63 billion boost from new Budget

March 21, 2012
Industry and investors have reacted positively to the UK Chancellor’s annual Budget.

Offshore staff

LONDON – Industry and investors have reacted positively to the UK Chancellor’s annual Budget. As expected, it contained various new measures to stimulate activity on the UK continental shelf.

Malcolm Webb, chief executive of Oil & Gas UK, welcomed the initiatives, which he believed would “result in tens of billions of pounds of additional investment to develop the UK’s economically important oil and gas reserves, all at no net cost to the Exchequer.”

The changes follow a year ofconstructive engagement with the Treasury, he added, and have taken into account the industry’s proposals.

“The introduction of legislation to enable the government to give the industry certainty on tax relief on decommissioning costs is a very significant step forward. The measure should delay decommissioning of oil and gas infrastructure, give rise over time to up to £40 billion ($63 billion) of extra investment, and result in the recovery of an additional 1.7 Bbbl of oil and gas.”

Webb added that the immediate extension of thefield allowance regime both to deepwater fields west of Shetland and to a wider range of small fields, along with a promised allowance for new investment in existing fields, was another plus.

“These measures, when implemented, should result in additional investment of over £10 billion ($15.9 billion) and the production of hundreds of millions of barrels of the UK’s oil and gas. It will also help to stimulate exploration for further oil and gas reserves. In the meantime, we look forward to taking the Treasury up on its offer of continued engagement on extended allowances for high-pressure/high-temperature fields.”

Webb concluded: “We see today’s action by the Treasury as a turning point for the UK’s oil and gas industry – towards a more stable future…The Treasury’s recently established Fiscal Forum is an important part of that process and we look forward to continuing to play a positive role in this.”

Derek Henderson, head of tax at Deloitte, said: “Following12 months of intense discussions on the constraint uncertainty around decommissioning relief has on activity and investment, the Chancellor announced today enabling legislation will be put in place to allow UK North Sea companies to enter into contracts with government, which should guarantee the future tax relief on decommissioning costs.

“This will remove a major fiscal risk for UK North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees. This will also free up capital available for investment and development of opportunities in the North Sea…Deloitte Petroleum Services Group estimates that the UK North Sea decommissioning costs are almost $50 billion over the next 30 years.”

Henderson said analysis by Deloitte showed levels of exploration and drilling activity on the UKCS last year were 34% lower than in 2010, and the lowest since 2003. To date, levels in 2012 have been comparable to the same period in 2011. The measures announced today, he added, show willingness of government to work with industry to create an environment in which the maximum economic recovery of hydrocarbons from the UK North Sea can be achieved in the years to come.

“Deloitte anticipates proposed measures will incentivize and encourage higher exploration and appraisal activity levels, brown field and new field developments and overall investment in the UK North Sea. It may also trigger further confidence in the financial markets to support UK oil and gas investment plans. It is likely that asset transfers and deal flow will increase especially for smaller players looking to tap into mature producing assets.”

Andrew Moorfield, managing director for Oil & Gas at Lloyds Bank said: “The proposed removal of uncertainty on decommissioning relief should be positive for the UK North Sea oil and gas industry. The current uncertainty is seen by many as a road block to North Sea drilling activity as it had severely cut the acquisitions of late life fields from the majors by UK oil and gas minnows. These minnows, with their management focus and technical expertise to maximize recovery of late life fields, have been a UK North Sea success story.

“The proposals are good news in that the current uncertainty should be lifted, but until the details are fully revealed, oil and gas companies are likely to remain cautious. The government’s proposal is welcome and should also go some way to reversing the negative impact on investment into the UK oil and gas industry resulting from the tax increase for oil and gas companies from the 2011 budget.”

Richard Forrest, partner in the oil and gas practice of global management consultancy A.T.Kearney, said: “The Budget and its implications for North Sea oil production is a positive move and, in our opinion, very well-targeted, particularly following previous negative tax changes to these oil reserves. Encouraging investment in the North Sea via tax changes, specifically for the more technical deeper water fields, is a good move and will entice oil and gas players who have investment options in many basins around the world.

“Moreover, securing future investment to maintain North Sea production will have a positive impact on the long-term prospect for oil and gas service sector in Scotland.

The move to create a £3-billion ($4.7-billion) new field allowance in the west of Shetland is also a great step forward. This will help drive innovation and capability in the UK oil and gas service sector and have the knock-on effect of supporting competitiveness beyond the UK.”