The UK is a net importer of oil and gas. Output continues to decline by about 7% per year, and common thinking attributes that drop in production in great part to decreased investment. So it is not surprising to discover that one of the country’s primary objectives in its bid to check production decline is to make UK investment more attractive.

Past, present, future

Production from the UK Continental Shelf (UKCS) peaked in 1999, but the country’s Department for Energy and Climate Change (DECC) estimates that 17 to 20 Bboe remain to be recovered. In fact, a current projection indicates domestically produced hydrocarbons will make up nearly 75% of the country’s oil requirements and about
66% of its gas requirements in 2010.

Of course, this projection is based on the country continuing to draw investors.

Data presented by William L. Transier, chairman and CEO of Endeavour International Corp. at a forum hosted in Houston last October by UK Trade and Investment at the British Consulate and the Texas Alliance of Energy Producers shows that gas production within the UK is dominated by majors and utilities. Five companies are responsible for about half of the country’s production.

Exxon Mobil Corp. produces 11.7% of the total, closely followed by BP with 11.5% and Shell with 11.3%. Centrica plc, the parent company of British Gas, produces 10.7% of the gas from the region, and ConocoPhillips produces 8.7%. Only 20% of production comes from other players; enticing new investors to the region makes sense.
Not surprisingly, the UK government has been working to improve the investment climate so more operating companies will find it profitable to explore and develop the UKCS.

Toward that end, the UK Treasury Department released a 72-page document late last year called “Supporting investment: a consultation on the North Sea fiscal regime.”
According to the report, there are two primary objectives: “To promote investment and production whilst striking the right balance between producers and consumers and ensuring a fair return for the UK taxpayer from the UK’s national natural resources.”

One of the ways the UK is planning to promote investment is through a tax break beginning this year for marginal fields in the North Sea. The objective of the tax plan, according to the Treasury Department, is to “encourage investment, improve certainty, facilitate asset trade, remove anomalies and reduce the impact of the fiscal regime on investment decisions.”

The changes being made to improve the tax structure and lighten the load on operators include:
• Extending the existing Corporation Tax loss carry back provisions to a fixed point of April 17, 2002 (it was previously set at three years);
• Extending the post-cessation period from three years to the point where decommissioning is completed;
• Extending 100% capital allowances to long-life assets (LLAs) and mid-life decommissioning, which is in line with the treatment of other UKCS capital investment;
• Aligning the treatment of pre-April 2008 North Sea LLAs with the treatment of non-North Sea LLAs (increasing the ongoing writing down allowance from 6% to 10%);
• Amending the Petroleum Revenue Tax (PRT) legislation to ensure that when a current license holder defaults on a decommissioning obligation and a former license holder is required to carry out decommissioning work, the former license holder will have access to the PRT relief the company would have been entitled to if it had remained party to the license; and
• Creating an entity that has the authority to allow the country’s Revenue and Customs department to remove fields from the PRT regime that are never likely to pay PRT.

All of these changes were legislated in the Finance Act 2008.

Interestingly, one of the issues Transier touched on in his presentation was prospectivity in terms of profitability (i.e., the impact of taxes and royalties). In a comparison of government take of a number of countries, he showed that the UK is well toward the bottom of the list, below such countries as Norway, Malaysia, Nigeria, India, Canada, and the US. That no doubt comes as a surprise to those who have heard so much talk about the restrictive investment climate in the UK.

Forward-looking efforts like the revised investment policy are addressing this perception. When the UK begins to capitalize on its efforts, the UKCS will be even more competitive.

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