Kemp: Britain Should Privatize Onshore Oil & Gas

Posted by Joseph Keefe
Monday, July 21, 2014

Oil and gas taxation has become a major source of conflict between producers and Britain's tax authorities.

But like other indirect taxes, the amount of attention oil and gas taxes draw is out of all proportion to the amount of money they raise for the treasury.

Britain raised less than 5 billion pounds ($8.5 billion) from taxes on oil and gas production last year, about 1 percent of all central government receipts, according to the authorities.

Oil and gas taxes raised less money than duty on alcohol (10 billion pounds) or cigarettes (9 billion) and only a little more than minor imposts such as insurance premium tax (3 billion), air passenger duty (3 billion) and landfill tax (1 billion).

Oil and gas revenues are tiny compared with income tax (152 billion pounds), national insurance (102 billion), value-added tax (100 billion) and fuel duties (27 billion).

Two-thirds of oil and gas tax revenues come from the ring-fenced corporation tax (1.6 billion pounds) and supplementary charges (1.9 billion) paid by companies operating in the North Sea and other areas off the coast and onshore, with the rest coming from petroleum revenue tax (1.1 billion).

Oil and gas producers no longer pay royalties on fields developed after 1982, even though the government, rather than private landowners, has owned all oil and gas deposits since the passage of the Petroleum (Production) Act in 1934.

In any case, royalty payments never amounted to more than a small share of receipts from oil and gas, and effectively stopped from 2003 with the exhaustion of older fields ("Statistics of government revenues from UK oil and gas production", June 2014).

MAJOR IRRITANT

In March, responding to heavy lobbying by the industry, the government promised a review - which was formally launched on July 14 - of North Sea oil and gas taxation.

"Exploration and production is becoming harder and more expensive, and the UK is facing competition for capital from other countries," the finance ministry admitted.

But the tiny amount of tax raised from Britain's oil and gas producers (other than payroll and sales taxes paid by all businesses) suggests taxation is not the reason behind dwindling North Sea oil production.

Many in the industry hope that improved fiscal treatment can restore the sector's fortunes, but that seems unlikely.

"Oil companies have welcomed the UK government's announcement ... that it is reviewing the North Sea oil and gas tax regime, amid concerns the fiscal burden is threatening the sector's long-term future," the Financial Times wrote, reflecting the industry line.

A tax overhaul could "slow down this precipitous decline we've been seeing in oil production", one producer told the newspaper ("Oil companies welcome North Sea tax review", July 14).

But with the entire industry paying just 4.6 billion pounds in direct and corporate taxes, it is unlikely taxation is the "burden" many claim.

The reality is that Britain's remaining offshore oil and gas deposits are relatively expensive to produce and investment is going to more promising areas such as North America's shale.

FISCAL STABILITY

The oil and gas industry is on firmer ground complaining about the complexity of the tax system and frequent changes made to tax rates and allowances, and the introduction and then abolition of various special levies.

Fiscal stability might help unlock more long-term investment - though the industry must accept its own share of responsibility for the complexity and unpredictability of the system. Much of it is the result of past tax avoidance and fierce lobbying for specific tax breaks.

The tax authorities have been playing an elaborate game of "whack-a-mole" with production companies to collect adequate revenue from Britain's offshore and onshore oil and gas fields.

"The regime has become too bespoke. It needs to be simplified and made more predictable," the head of the Oil and Gas UK trade association acknowledged to the Financial Times.

Greater stability will require a more open and trusting relationship between the operators and tax collectors, something that will not be easy to achieve.

MINERAL RIGHTS


The government's focus is now shifting towards encouraging more onshore exploration for oil and especially gas. Ministers have hinted that yet another special regime could be created to encourage the development of relatively high-cost onshore shale deposits.

Britain has extensive shale oil and gas deposits in three major onshore sedimentary basins, which policymakers hope could be brought into production.

There are many challenges but among the stiffest is intense opposition from some local communities and green groups to hydraulic fracturing in rural areas.

Part of the problem, as many analysts have noted, is that local communities will bear all of the costs of oil and gas exploration without capturing any of the benefits.

Unlike in the United States, landowners do not own any oil and gas that might be found beneath their property, so cannot claim royalties or other payments from producers.

The 1934 Petroleum Act nationalised all oil and gas deposits in Britain.

Public ownership makes sense for offshore oil and gas, since the state, in the form of the Crown Estate, has always controlled the seabed.

But it makes less sense for onshore oil and gas, for which private ownership was the norm until 1934.

The UK Onshore Operators Group, a trade association, has developed proposals for compensating communities that host shale wells by paying them for each well drilled plus a small share of the proceeds from any hydrocarbons from the well ("UKOOG Community Engagement Charter").

The government has taken this a step further by making payments to local communities a condition of future exploration and production consents.

But it would make more sense simply to transfer the ownership of oil and gas back into private or community ownership and enable operators to negotiate commercial agreements with communities directly.

PRIVATIZATION

There would be no significant loss of government revenue, and the prospect of a financial windfall might make local residents more willing to accept drilling in their community.

Landowners are already compensated (through royalties) for extracting other minerals except oil, gas, coal, gold and silver, according to the British Geological Survey ("Legislation and policy: mineral ownership").

The system works well for other substances found below ground. There is no reason why the same system should not now apply to oil and gas.

There would be complications. In some instances, the ownership of the surface land has been severed from ownership of the mineral rights beneath it. But that is not an insuperable obstacle.

While the rights to other minerals may be owned by other private owners, the rights to oil and gas are currently owned by the government, so they could be transferred to individuals or communities.

The bigger issue is how to handle conflicts between neighbouring landowners in which some but not all would receive a financial windfall.

But settling such disputes is the purpose of the local planning system. Local authorities are already involved in all aspects of the process from planning permission to traffic management and the regulation of noise and other nuisances.

Current proposals from the government and industry recognise that local landowners and communities have a stake in the oil and gas industry.

Why not go the whole way and grant them ownership and financial rights to participate in oil and gas production by privatising underground oil and gas deposits? ($1 = 0.5858 British pound)

 

By John Kemp

Maritime Today


The Maritime Industry's original and most viewed E-News Service

Maritime Reporter July 2016 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

No Clues on Hanjin's Financial Health

Cash-strapped Hanjin Shipping Co. sources say that the negotiations with tonnage providers for lower rates are undergoing, but wouldn't say much else.   According to Korea Herald, the country's No.

DP World's H1 Volumes Rise

Ports operator DP World reported on Tuesday first-half 2016 gross container volumes up 1.2 percent on a like-for-like basis and up 2.5 percent on a reported basis.

Samil PwC Okays Hyundai's Management Improvement Plan

Hyundai Heavy Industries (HHI) is notified by Samil PwC, a local member of the global accounting firm PwC, that its 3.5 trillion won worth management improvement

Contracts

Technip Bags Woodside's Subsea Contract

Technip has been awarded a large(1) subsea contract by Woodside to support the development of the Greater Enfield Project offshore Western Australia, at a water

LNG-fueled Bulker Ordered from Korea

Hyundai Mipo Dockyard (HMD) has signed a contract to build a 50,000 dwt bulk carrier with ILSHIN LOGISTICS. The project is a collaboration between POSCO and ILSHIN

Broad Declines drag Baltic Index down

The Baltic Exchange's main sea freight index, tracking rates for ships carrying dry bulk commodities, fell on Tuesday on lower rates for capesize, panamax and supramax vessels.

Finance

Baltic Index Down as Rates for Large Vessels Stay Weak

The Baltic Exchange's main sea freight index, tracking rates for ships carrying dry bulk commodities, fell on Wednesday on weaker rates for larger vessels and supramaxes.

Summer Cruise to North Sea Oil Rigs Amazes Tourists

Bored with palm-fringed beaches and turquoise seas? Then the gigantic oil platforms of the North Sea beckon. The first ever "rig-spotting" cruise just ended off the coast of Norway,

No Clues on Hanjin's Financial Health

Cash-strapped Hanjin Shipping Co. sources say that the negotiations with tonnage providers for lower rates are undergoing, but wouldn't say much else.   According to Korea Herald, the country's No.

Energy

Summer Cruise to North Sea Oil Rigs Amazes Tourists

Bored with palm-fringed beaches and turquoise seas? Then the gigantic oil platforms of the North Sea beckon. The first ever "rig-spotting" cruise just ended off the coast of Norway,

Technip Bags Woodside's Subsea Contract

Technip has been awarded a large(1) subsea contract by Woodside to support the development of the Greater Enfield Project offshore Western Australia, at a water

Staying Afloat Down Under?

In recent years, Australia has been a major growth area for offshore gas production and a key driver of offshore CAPEX, says Clarksons Research.   However, the

LNG

Staying Afloat Down Under?

In recent years, Australia has been a major growth area for offshore gas production and a key driver of offshore CAPEX, says Clarksons Research.   However, the

LNG-fueled Bulker Ordered from Korea

Hyundai Mipo Dockyard (HMD) has signed a contract to build a 50,000 dwt bulk carrier with ILSHIN LOGISTICS. The project is a collaboration between POSCO and ILSHIN

VesselValue.com: $28.4B Worth of Ships Delivered to Date

As the calendar now indicates we have passed the half year mark on 2016, VesselValue.com offers insight on the number and value of all the 2016 built vessels that

News

Cambodia Urged ASEAN to Avoid Words That Escalate Tension

Cambodia advised a grouping of South East Asian nations to avoid using words that "would escalate tension between China and the Philippines" in a weekend statement,

Technip Bags Woodside's Subsea Contract

Technip has been awarded a large(1) subsea contract by Woodside to support the development of the Greater Enfield Project offshore Western Australia, at a water

Keel Laying for Russia's Second Nuclear Icebreaker

Today the Baltic Shipyard in St Petersburg (part of United Shipbuilding Corporation) laid the keel of Ural, Project 22220’s second series-produced nuclear icebreaker.

People in the News

KVH's Zika Virus Safety Video for Mariners

KVH Industries, Inc., (Nasdaq: KVHI), announced today that it is offering Videotel’s new safety and training video about the Zika virus free to all mariners worldwide.

Guzmán Re-elected Harbor Commission President, Long Beach Port

Harbor Commission President Lori Ann Guzmán was re-elected Monday evening to serve a second one-year term leading the board that oversees the Port of Long Beach, the nation’s second-busiest seaport.

DP World's H1 Gross Volumes up 1.2%

DP World Limited handled 31.4 million TEU (twenty-foot equivalent units) across its global portfolio of container terminals during the first half of 2016, with gross container volumes growing by 2.

Government Update

Cambodia Urged ASEAN to Avoid Words That Escalate Tension

Cambodia advised a grouping of South East Asian nations to avoid using words that "would escalate tension between China and the Philippines" in a weekend statement,

Guzmán Re-elected Harbor Commission President, Long Beach Port

Harbor Commission President Lori Ann Guzmán was re-elected Monday evening to serve a second one-year term leading the board that oversees the Port of Long Beach, the nation’s second-busiest seaport.

China Asks U.S. to Support Resumption of Talks with Philippines

China's foreign minister has asked the U.S. secretary of state John Kerry to support the resumption of talks between China and the Philippines over the South China Sea,

 
 
Maritime Careers / Shipboard Positions Maritime Standards Offshore Oil Pipelines Port Authority Ship Electronics Ship Repair Ship Simulators Shipbuilding / Vessel Construction Sonar
rss | archive | history | articles | privacy | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1527 sec (7 req/sec)