Oil & Gas UK perplexed by move against drilling rigs

Published:  24 March, 2014

Oil & Gas UK says it is perplexed by the move of UK Chancellor of the Exchequer, George Osborne’s decision in the recent Budget to change the basis for taxation of drilling rigs and accommodation vessels supplied using bareboat chartering arrangements to the UK’s offshore oil and gas industry, despite evidence that this new tax measure could prove damaging to exploration and development activity.

Malcolm Webb, chief executive of Oil & Gas UK did however welcome the UK Government’s support for the recommendations of the Wood Report and the review of the industry’s tax regime to address the challenges and opportunities faced by the mature North Sea.

The consultation on a new allowance to encourage much needed investment in ultra-high pressure high temperature (u-HPHT) oil and gas field clusters was also welcomed - the proposed new allowance for u-HPHT clusters could be a game changer for technically challenging prospects in the North Sea. The allowance has the potential to attract 
£5 -6 billion of investment in the near term if it is pitched at the appropriate rate. The measure should also encourage broader collaboration around acreage near key infrastructure hubs.

However, Oil & Gas UK is concerned by the bareboat chartering tax measure. While the change may raise tax yield in the short term, Oil & Gas UK expects day rates for drilling rigs and floating accommodation vessels (known as flotels) will rise as a result, driving up costs and deterring much needed exploration.

Webb said: “This can only increase costs on the UKCS where operating costs have increased sharply in recent years and last year saw a rise of 15.5% to an all–time record of £8.9 billion, and new developments are facing similar cost pressures.

“In addition, we fear that this move will drive drilling rigs, already in short supply, out of the UKCS. Exploration over the last three years has been at its lowest in the entire history of the industry in the UK, with only 15 exploration wells drilled in 2013.”

Pic caption: Malcolm Webb, chief executive of Oil & Gas UK