UK: Extending The Shelf Life

Last Updated: 18 December 2012
Article by Christopher Connors

Recently, the UK Government has been putting more emphasis on the role of the UK Continental Shelf ("UKCS") in aiding the UK's recovery from economic recession. The Chancellor has identified the UKCS, with its oil and gas reserves, as a significant source of income for the Government, particularly at a time when the UK economy continues to struggle against a difficult global climate.

However, the charges levied on the UKCS by the Government have been increasingly criticised by the oil and gas industries, which are feeling the strain as the UKCS shoulders a significant burden in supporting the economy. This criticism has grown louder of late due to a further tax rate increase in the 2011 Budget. However, there is an indication that the Government's attitude is changing slightly in the face of a continuing downturn, as it seeks to increase productivity and maximise the overall tax revenue it can extract from the UKCS.


The UKCS is a loose definition for the waters surrounding the UK. More precisely, it defines the offshore area over which the UK claims sovereignty, which also allows the UK to claim mineral rights and exploit the natural resources beneath the sea bed.

Whilst the UKCS refers to all UK coastal waters, the area in which the main activity of mineral exploitation (notably crude oil and gas reserves) takes place currently is of course the North Sea.

Having been in operation since the early 1970's, the UKCS is now classified as a 'mature field' with reduced upstream (exploration) activity now taking place as compared to other, newer sites, and an increasing focus is on decommissioning of existing field operations.

Taxes Levied on the UKCS

Oil and gas companies are subject to a comprehensive and complex tax regime, made up of a number of different taxes and charges. The level of taxation is also significantly higher than a 'standard' large company in the UK, which could expect to be taxed at a maximum corporation tax rate of 24% for the 2012/13 tax year.

The following is an abridged list of the main taxes to which UKCS companies could expect to be subject:

Ring-Fenced Corporation Tax

Like most UK companies, corporation tax is levied on UKCS companies, but with the addition of 'ring-fencing'. This ring fencing is designed to ensure that profits from oil extraction (as opposed to other activities in which the company may engage) are specifically taxed in full, as and when such profits are accrued. For example, losses or reliefs accrued in other parts of a company's business are not available for offsetting against oil extraction profits.

The rate of corporation tax for UKCS companies is 30%. This is higher than the standard rates of corporation tax applicable to most UK companies (the range of which is currently 20%-24%).

Supplementary Charge

In addition to the standard 30% corporation tax charge, there is a 'supplementary charge' levied on UKCS companies. The profits on which the charge is based are the same as for the ring-fenced corporation tax charge, with the exception that financing costs are not deductible against profits in calculating the supplementary charge.

Petroleum Revenue Tax ("PRT")

PRT was established in order to tax so called 'super-profits' of the UKCS companies, and is a field-based tax. PRT is charged at a rate of 50% on profits per field, with various allowances and reliefs available to offset the charge.

PRT was abolished on 16 March 1993, but only in relation to fields which were given development consent on or after that date. Given that the UKCS is classified as a mature site, many of the individual fields which have been established will have been constructed before this date, meaning that PRT is still an issue for many operations in the UKCS.

The 2011 Budget

In the 2011 Budget, the supplementary charge was raised from 20% to 32%, in an announcement which took the industry by surprise. This was accompanied by measures limiting fuel duty increases for consumers, which were financed by the estimated £2bn generated from the increased supplementary charge.

In addition to being generally unexpected, the increased supplementary charge was also heavily criticised by key figures in the industry, including the managing director of Centrica Energy and the economics director of Oil and Gas UK. Concerns were raised that the increase could damage longer-term energy security in the UK, and a prediction that jobs would be lost as production decreased.

Continuing Downturn

The raising of the supplementary charge was predicated on the basis that the oil and gas industries were benefitting from a healthy bottom-line. Soaring oil prices in 2010-11 saw companies making substantial profits, regardless of the general economic downturn affecting the economy, and the increased supplemental charge was seen as a way of hedging against the general recession by drawing on these profits. However, whilst profits were increasing, the global oil and gas industry has not been immune to the downturn and other commercial pressures. Management teams at many companies, large and small, have been in a state of flux in recent years, and oil prices continue to be volatile.

In addition, the UKCS has been under increasing scrutiny as it matures, with more focus on decommissioning costs as opposed to upstream activities. Larger oil and gas companies are beginning to review their operations in the area, with some fields being passed to smaller companies as they become less productive and more work-intensive. In addition, extraordinary events such as the Elgin gas leak have continued to add pressure.

All of these contributory factors were cited as reasons for the UK economy's poor performance in July 2012, when government public borrowing of £600m was required in a month which is historically strong for tax revenue. Ordinarily, receipts from the UKCS companies have contributed significantly to the Government's tax income, and the unexpected borrowing required in July brought the issues affecting the UKCS into the spotlight.

September 2012 Announcement and the Future

In an effort to reinvigorate the UKCS the Government announced, on 7 September 2012, that certain mature sites (known as 'brown field sites'), will benefit from a tax allowance which will shield some income from the supplementary charge. In turn it is predicted by some industry experts that this concession will encourage investment into the UKCS, and create further jobs in the industry. It also emphasises the UK Government's message that investment into the UKCS can be as beneficial as sourcing and developing new sites.

Whilst the UKCS matures as a body of resources, the Government continues to regard it as a central source of revenue generation, and is seeking to encourage further development and maximise returns from fields approaching the end of their operational lives. As well as the September 2012 announcement, there were also some signals of intent earlier in the year as part of the March 2012 budget announcements, including the following:

  • a new £3bn field allowance, focussing on deep field operations off the West coast of Shetland;
  • an increase in allowances for small fields (to £150m); and
  • the announcement that the Government is to consider potential changes in order to promote the development of 'High Pressure, High Temperature' drilling fields. These have traditionally been overly-problematic for the UKCS, due to the combination of both high pressure and high temperature, rather than one or the other.

Therefore it seems that, even as the UKCS matures, it will be heavily relied upon for supporting the UK economy during the downturn. The difficulty the Government faces is balancing any tax increases against the maximisation and encouragement of development. Solving this conundrum would ensure that healthy revenues are maintained, but not at the cost of declining output or job losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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