UK oil and gas industry relieved at removal of royalty

Nov 27, 2002 01:00 AM

The UK oil and gas industry is relieved that the uncertainty over the abolition of Royalty has at last been removed following the Chancellor’s statement that Royalty will no longer be paid by the North Sea’s 30 oldest oil and gas fields from 1 January 2003. Removal of Royalty will aid future investment plans for these fields which, with fresh injections of capital, could potentially yield up to an additional estimated 440 mm boe of recoverable reserves.
It also means that the marginal rate of tax paid by around a dozen of these fields will be reduced from 74 % to 70 %. New investment is important not only to extend the lives of these fields, prolonging production, jobs and revenues, but also because their infrastructure can be used to recover reserves in marginal fields stranded nearby.

The removal of Royalty does not however heal the damage done to the Industry by the recent changes to the tax regime overall. The impact of the supplementary Corporation Tax charge introduced in April, even allowing for Royalty abolition and the 100 % capital allowances for new investment, has been to increase the tax burden on the oil industry by some £ 8 bn by the end of the decade.

Additional notes
1. The UK Offshore Operators Association (UKOOA) is the representative organisation for 28 oil and gas exploration and production companies licensed by government to operate in offshore Britain.
2. Only the oldest oil and gas fields -- those that received development consent on or before 31 March 1982 -- pay Royalty. Royalty is charged at 12.5 % on the gross value of oil and gas produced from UKCS fields, less an allowance for the costs of conveying, treatment and initial storage.
3. There are around 30 pre-1982 fields in the UK continental shelf (UKCS) currently paying Royalty on revenues in addition to Corporation Tax. In 2001, the fields accounted for some 20 % of total industry capital investment, which stood at £ 3.5 bn. About a dozen fields also pay Petroleum Revenue Tax (PRT), which means thatthe current aggregate marginal rate of tax paid by these fields is 74 %, reducing to 70 % from 1 January 2003 on Royalty abolition.
4. Royalty payments are offset against Petroleum Revenue Tax, Corporation Tax and the Supplementary Corporation Tax. This means that the total net amount of Royalty paid by Industry from April 2002 to the end of 2002 is estimated to be around £ 100 mm
5. Two mature fields were granted Royalty remission in 2001. These were Talisman’s Beatrice Field and CNR International’s Columba E Terraces.

Source: UKOOA - United Kingdom Offshore Operators Association
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