Economic Report 2002 Index

Appendices Appendix I UKCS Employment This Appendix describes the current methodology used to determine the number of jobs supported by the offshore oil and gas industry in the UK. Changes in this methodology, also discussed below, are under review by the Office of National Statistics and other statisticians, which seem likely to increase the estimates traditionally made by the oil industry Current Methodology: Estimates of Jobs Supported by the UK Offshore Oil and Gas Industry: (CogentSI / PACEC) Industry data on historic UKCS expenditures are taken from the DTI's Energy Trends. Estimates of current and future expenditures are developed from data supplied to UKOOA by all of the UKCS operators in September 2001. They exclude spending on downstream activities (e.g. refineries, petrochemical plants and onshore pipeline distribution networks) and exports. These expenditures are combined with detailed data on the costs and purchase patterns of British business contained in UK Input Output Tables published by the Office of National Statistics,1998 being the latest year available. I/O data for 1999 and subsequent years are estimated. Direct employment and self-employment data are classified to the mineral oil and natural gas industry. Indirect employment arises: a) in the contractors and suppliers with whom the industry deals directly in its operating and exploration activities and b) as these companies call upon sub-contractors and suppliers and related supporting industries. Induced employment results as the incomes earned along this chain are spent, and create jobs in the communities where employees live and beyond. Estimates exclude jobs created when: dividends and profits are spent other than on investment; national local taxes paid by the industry are put to use; investment is made outside the industry, e.g. by the supplying industry, or the housing needs of employees. In 2001 the estimated number of jobs per £million spent were 26 on Exploration, 41 on development and 24 on operations, or 32 jobs per £million across the sector (37 in 1996). Proposed Changes: Changes in methodology for estimating job numbers are currently being considered. These have arisen from changes introduced by the Office for National Statistics, following their identification of a number of relevant activities not covered by the Department of Trade and Industry's PQ1100 quarterly survey, and the inclusion of other improvements which are part of ongoing developments in National Statistics affecting all industries. The methodology used to estimate jobs is based on expenditures in three broad categories: Exploration, Development and Operations. Expenditures in each category are then applied to the ONS Input Output tables which show the relationships between the direct, indirect and induced spending. Indirect and induced spending themselves have several 'rounds' or tiers of impact. The Input Output tables, which are published annually in conjunction with the ONS Blue Book, reflected the change in methodology in the 2001 Blue Book, but the data had not become available in time for publication of UKOOA's Economic Report 2001. According to CogentSI there have been huge shifts in the 'combined use' matrices between 2000 and 2001 Blue Books. There is a big switch in the oil and gas input pattern towards low-import labour-intensive industries, such as construction, structural steel and legal services. This has the consequence that indirect employment is very much higher than previous estimates in the first 'round' and the multiplier is higher too. Further developments in National Statistics mean that a closer analysis will be possible in 2003. This will be based on a finer categorisation of oil and gas industry expenditure, and revisiting the geographic distribution into regional and constituency elements. The latter is to be developed from new Regional Accounts consistent with the 2001 and subsequent Blue Books. These were originally scheduled to be issued in April 2002, but delayed for quality control reasons. The reassessment of both the oil and gas statistics and the regional analysis are entirely a result of higher standards being set for official statistics now than has been possible in previous years. Appendix II Fiscal regime Corporation Tax (CT) is applied to all company profits in the UK at a rate of 30%. However the CT regime applying to the oil and gas exploration and production industry is modified and extended, and in addition production has been subject to two additional imposts, namely Royalty and Petroleum Revenue Tax (PRT). As a consequence of the Finance Act 2002 (enacted on 24th July 2002) a number of changes were made to the North Sea fiscal regime. The two most significant changes for oil and gas were the introduction of the Supplementary Charge (SCT) at a rate of 10% from 17th April, and the introduction of 100% First Year Allowances for UKCS capital expenditure again from 17th April. The Chancellor also announced the Government's intention to abolish Royalty and this was confirmed during his Pre-Budget Statement on 27th November. Figure 36 illustrates the marginal Government take on oil and gas fields since 17th April and reflects the abolition of Royalty from 1st January 2003. Royalty: This applied to fields which had received development consent before 1st April 1982. Following the announcement in the Pre-Budget Statement on 27th November, Royalty was abolished from 1st January 2003; some 30 fields benefit from its abolition. Royalty was charged at 12.5 per cent on the gross value of oil and gas produced from UKCS fields, less an allowance for the costs of conveying, treatment and initial storage. The abolition of Royalty has not only reduced the high aggregate rate existing previously but it has also removed a "tax" which heavily penalised expenditure on drilling costs which were not deductible for Royalty. Petroleum Revenue Tax (PRT): This applies to fields which received development consent before 16th March 1993 and to pipeline systems and other facilities which in some part service a PRT paying field. A 50% rate is applied to profits on a field-by-field basis in six-month chargeable periods. If losses arise the ability to surrender to other fields is extremely limited. PRT is deductible for CT and SCT. Capital and operating costs are also deductible. No deduction is allowed for interest, but most capital incurred pre payback (see below) qualifies for an additional deduction of 35% (uplift). As most fields subject to PRT are past payback, the significance of this relief has reduced. Payback is the period in which total cumulative income exceeds total cumulative expenditure. This period not only determines the cut off for uplift but also dictates the number of six-month periods for which safeguard applies. Safeguard was introduced as a safety net for the benefit of the less profitable fields essentially to ensure that in the early years of field life the PRT cannot exceed a level that would reduce the participators after tax profit below a minimum return on investment in the field. It limits PRT in each six-month chargeable period to 80% of the excess profits over 15% of cumulative capital which has qualified for uplift. It applies to the period from the start of production to the period of payback plus half as long again. It will not apply if it calculates PRT in excess of the "normal" calculation. An "Oil allowance" can be applied for fields with development consent on or before 31 March 1982, which makes the first 250,000 tonnes per six-month period, up to a cumulative total of 5 million tonnes, PRT free. For southern fields the amounts are 125,000 and 2.5 million tonnes, and for all other taxable fields 500,000 and 10 million tonnes respectively. A "Tariff Receipts Allowance" is available for some income streams which makes the first 250,000 tonnes of throughput for each user field per six-month period, PRT free. Gas sold under contracts entered into before 30 June 1975 is exempt from PRT. Corporation Tax (CT): This applies to all company taxable profits at a rate of 30%. Since the introduction of 100% First Year Allowances in 2002, all costs are effectively tax deductible as incurred, with the exception of long life assets which secure a 24% First Year Allowance, and 6% of the remaining balance on a reducing balance basis. Taxable profits derived from the extraction of oil and gas from the UKCS are also "ring fenced" so that losses from other activities cannot be offset against ring fenced profits. Also stringent rules are applied to ensure that only interest relating to UKCS projects is deductible within the ring fence. Supplementary Charge (SCT): This applies to all ring fence profits at a rate of 10%. The taxable profit for SCT only differs from CT in that finance costs are not deductible. Taxation on mature fields and infrastructure The aggregate marginal rate of tax is now 70% when taking into account royalty abolition, PRT, CT and SCT. This is high by international standards, particularly when taking into account the maturity of the UKCS province and the high costs incurred pre- tax in maintaining the current developments and making further investment to access and develop ever smaller accumulations within the mature fields themselves or in nearby satellites. This high aggregate rate penalises the additional drilling activity that is essential to enable maximum recovery. The transportation infrastructure on the UKCS is subject to various combinations of PRT, CT and the SCT. These variations give rise to a potential distortion to the investment decision process and to the competition between existing infrastructure systems. [Ultimately the fiscal system should be one which encourages the most efficient use of capital invested, and to facilitate this the tax distortions need to be reduced to a minimum. A level playing field should be the ultimate objective.] In both the instance of mature fields themselves, and the existing infrastructure which service them, the fear is that high costs (of which tax is one) will cause premature cessation of production and early decommissioning. Once closed the potential for the development of satellite reservoirs will be lost forever and it could also cause the premature cessation of other larger fields which are connected to pipelines which cease as the large host fields to which they are connected decommission. Appendix III Glossary of Terms and Abbreviations bbl Barrel (1 barrel = 35 imperial gallons approximately) bcm Billion cubic metres (1 cubic metre = 35.3 cubic feet) billion One thousand million Boe Barrel of oil equivalent(1 boe= 5.8 thousand cubic feet bcfpd Billion cubic feet per day bpd Barrels per day boepd Barrel of oil equivalent per day Brown Fields Fields currently in production or under development Capex Capital expenditure CT Corporation Tax cfpd cubic feet of gas per day DTI Department of Trade and Industry EU European Union FYA Fist Year Allowances GoM Gulf of Mexico mboe Million barrels of oil equivalent Mbpd Thousand barrels per day NTS National Transmission System ONS Office of National Statistics OPEC Organisation of Petroleum Exporting Countries Opex Operating costs OSPAR Oslo and Paris Convention for the Protection of the Marine Environment of the North East Atlantic PILOT Successor to the Oil and Gas Industry/Government Task Force (OGITF) PIU Performance and Innovation Unit PRT Petroleum Revenue Tax p/therm Pence per therm ROCE Return on Capital Employed SCT Supplementary Charge (10% on top of Corporation Tax) SNS Southern North Sea tcf Trillion cubic feet tcm Trillion cubic metres Trillion One million million UKCS United Kingdom Continental Shelf UKOOA UK Offshore Operators Association