Global Competitiveness

Impact of the Increase in SCT on the UKCS

The increase in SCT may have an unintended long-term impact on the UKCS:

1. Oil and gas activity in the UK is now ~ 16% less attractive. The increase in SCT reduced the value of new exploration and development, which in turn will reduce the global competitiveness of the UK, damage investment and, ultimately, security of supply.
2. The UKCS is now increasingly exposed to lower oil and gas prices. Investment and drilling activity were declining rapidly on the UKCS prior to the increases in oil price seen in 2004. It should be anticipated that activity would again decline sharply if oil and gas prices revert to more usual levels.
3. Marginal / riskier developments are less attractive. In 2002 when SCT was introduced, capital allowances were increased to encourage investment. This time there was no increase to capital allowances, which will impair the attractiveness of investments.
4. Investors now add a risk premium to UK investments because of fiscal instability. This makes investment in the UKCS less attractive, particularly when compared against global competition.
5. The short term impact of the tax increase in isolation may be limited but gives cause for concern when combined with rapidly rising costs. The surge in oil price has increased activity which will only be tempered in part by the increase in tax. At this time availability and costs of rigs and other resources are the primary constraints on activity. Indeed, rapidly escalating rig-rates may begin to deter investment.
6. The offer of stability for the life of this Parliament may provide only limited comfort for investors. Given that investments typically take between 2 -5 years to come on stream, investors may still consider that they are significantly exposed during the productive life of new developments.
7. Post-tax rate of return of the UKCS has declined over the last five years. The 2002 tax increase had already increased the economic rent transferred to HM Treasury. The latest increase will further depress post tax rates of return. It also raises concerns about the long term competitiveness of the basin, the more so when oil and gas prices have been rising.