According to new research by renowned petroleum economist Professor Alex Kemp and long-time research partner Linda Stephen of Aberdeen University, restructuring of the UKCS fiscal regime may be necessary before a possibly significant volume of known and potential oil & gas resources in the North Sea can be developed.
In the paper: How Can the North Sea Oil and Gas Industry be Revitalised?, Kemp & Stephen state:
“From the analysis of the economics of new field investments and exploration in current circumstances in the UKCS it is clear that, at $50 and $60 prices, there are many ‘marginal project investment situations.
The tax rate reductions introduced in 2015 and 2016 have two effects. Firstly, they enhance cash flows on existing operations. In a situation where the industry as a whole is cash flow negative this is undoubtedly appropriate.
But with respect to new field investments the effects are more complex. The effect on incentives and returns to investors depends on the combined effects of the reduction in the tax rate on income and the reduction in the rate of relief for the investment costs.
It was found that, on small fields where the pre-tax returns were quite modest, the reduced rate of relief could be more important than the reduction in the tax rate on income.
On larger fields and on small fields with higher oil prices, the reduced tax on income is more important than the reduced rate of relief.
Reductions in the rate of CT (Corporation Tax) rather than SC (Supplementary Charge) were found to be more potent in incentivising new investments. In current circumstances there is a case for reducing the CT rate which, at 30%, is now far above the non-North Sea rate.”
However Kemp & Stephen also recognise that tax incentives alone are not enough to ensure a fruitful future for maximising the remaining resources on the UKCS. “To facilitate the development of the many uneconomic fields, technological advances are also necessary.”