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1999 Annual Report

Fiscal Issues

One of the most critical factors that affects the confidence and economic stability of the industry is the fiscal regime - the taxes and royalty payable by the holders of exploration and production licences on the UK Continental Shelf. While the economics of the upstream oil industry’s investments are affected by many factors that are largely outside the government’s control - e.g. geological prospectivity, reservoir performance, the costs of development and the price of crude oil and natural gas - the fiscal regime is dictated by Government. The industry continues to seek an attractive and stable regime appropriate for the conditions in a mature basin.

The Oil and Gas Industry Task Force created a new forum for dialogue. Nowhere has that been more important than in understanding the factors that influence the profitability of exploration and production, upon which the jobs of some 300,000 people and the livelihoods of many more depend. 1999 commenced with the prices of crude oil and natural gas close to $10 per barrel of oil equivalent – its lowest in real terms since oil production commenced in 1975. The UKCS, being a high cost area by international standards, has felt the effect more than most oil and gas producing regions. Exploration declined as rig contracts expired and were not renewed, and field developments fell from a record 38 in 1998 to only 5 in 1999. In the second half of 1999 the oil price recovered to over $20 per barrel. Gas prices have not recovered to the same extent and this is a concern given that gas now accounts for some 40 percent of the UKCS activity. We believe that the Government’s Stricter Consents Policy for gas fired power stations is having an effect here by continuing to depress demand for new gas. These market conditions set the environment for the Fiscal Task Group agenda.

In March 1999 all UKOOA members were surveyed to project the industry’s aggregate exploration, development and operations spending over the period to 2002. Independent academic consultants were hired to interpret the data and assess the likely impact on jobs and where the expenditure cuts were most likely to be felt. The survey indicated a serious decline in exploration activity and development spending, but ongoing operations were only marginally affected. The survey’s findings were shared with Government. A bi-monthly survey of the industry’s contractors and suppliers was also conducted to gather data on their confidence and employment trends.

The need to rationalize assets among licence holders and operators in the North Sea was identified by the OGITF with its UKLIFT (http://www.uklift.co.uk) website initiative for trading assets. Reinforcing this objective the Fiscal Group promoted the need for Capital Gains Tax Rollover Relief, which was restored in an amendment to the 1999 Finance Act.

The need to monitor and understand the commercial success of exploration and its competitiveness was identified in earlier work by UKOOA, and academic studies were commissioned to update this work. An update of the database of the industry’s operations and projections of new activity was also commissioned to assist an analysis of the impact of the fiscal regime on activity. The regime for mature fields, and the extent to which the marginal tax rate of nearly 70% discourages new incremental developments in these fields as they move towards the end of their life, continues to be of concern to members. UKOOA believes that lowering this very high marginal rate for incremental investment in mature areas is a key objective.

The need to understand the industry’s economics and educate interested parties has stimulated three initiatives:

    * An all party group of members of Parliament was established, which provides a useful vehicle for communication to Westminster. A similar group was later established for the Scottish Parliament.
    * Early in 2000 UKOOA will be publishing an Economic Report which provides data on industry activity, financial statistics and other current topics of concern to stakeholders in the Industry.
    * The Fiscal Task Group has also initiated a series of seminars with Government officials to encourage dialogue on specific areas of interest, such as decommissioning, innovation and employment modelling.

In addition the group is represented on and aligned with the Economic Advisory Group of PILOT, the OGITF’s successor.

High oil price not reflected in gas market
short term oil and gas prices
Source:  Plats, Heren index

Please click on the image below to view the full chart:

Short term oil and gas prices

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