Global Competitiveness

UKCS Rates of Return

The Office of National Statistics (ONS) regularly publishes details of the Rates of Return for the oil and gas sector. This profitability measure is more usually referred to as “Return on Capital Employed” (ROCE). It is an accountancy measure calculated as the ratio of EBIT (Earnings before Tax and Interest) to capital employed.

ONS follows the convention in reporting Rates of Return (ROCE) on a pre-tax basis. However, in doing so it fails to highlight that the UKCS is taxed at a much higher rate than other industries, with marginal tax rates ranging from 40% – 70% in 2005 rising to 50% - 75% from 1 January, 2006.

Figure 47: UKCS Rate of Return (Pre- and Post Tax) 1995 - 2005

The above chart compares ONS Rate of Return (ROCE) on both a pre-tax and post-tax basis for the UKCS over the last decade. Despite the increase in oil price since 2003, the post tax rate of return has declined over the last five years. In large part, this reflects the tax increase imposed on the UKCS in 2002; it demonstrates that even before the latest tax increase in 2005, the fiscal regime was already very effective in transferring economic rent to HM Treasury. The continued decline of the post-tax Rate of Return also raises concerns about the long term competitiveness of the basin, all the more so when oil and gas prices have been rising.

Moreover, UKOOA has fundamental reservations on the use of Rate of Return (ROCE) as a measure of profitability. Economic measures are used to drive investment rather than accountancy measures such as Rate of Return (ROCE). UKOOA consider that ONS figures understate the massive capital investment in the UKCS, leading to an over estimation of the Rate of Return. In recognition of this, ONS, on their website, express concern about the use of this measure for the UKCS.