Tax and oil E&Ps

7th Jan '11 by doverbeach

7 comments 3156 reads

I thought it might be interesting to have a thread on taxation issues for E&Ps - somewhere for news, comparisons, questions etc.

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Doverbeach

Premium Member

7 comments

doverbeach

7th Jan '11

Ukraine tax hike bad news for JKX:

Whilst the detailed effect is yet to be clarified, it is apparent that PPC will be subject to a substantial increase in unified production related taxes albeit that this will be partially mitigated by a progressive reduction in the rate of corporate tax from the current level of 25% to 16% by 2014. The overall impact of these changes is anticipated to be an immediate increase in PPC's effective tax rate from approximately 30% to approximately 50%.

price down c 8% at the moment

loglorry

7th Jan '11

Interesting thread db. I have been trying for a while to work out what the heavy oil tax breaks announced in 2009 actually mean in numbers terms for tax on companies like Xcite and Nautical. I'm not sure if anyone out there has the details but if you do can you please post them. There is lots of info online about their existance but so far not much about what this actually means. I also note that included in these tax breaks is development of smaller fields e.g. sub-20m barrels in the North Sea. Might be of interest to PMG or DEO if they ever get up and running.

Log

StrollingMolby

7th Jan '11

Log,

Not sure if this North Sea fiscal guide is a help or not http://www.hmrc.gov.uk/international/ns-fiscal2.htm

I too recall the 2009 Budget in which relief for firms producing heavy oil was introduced. I've now found the Budget statement in which fields with oil with <18 degrees API qualified for upto £800m (max £160m p.a.)

http://www.hmrc.gov.uk/budget2009/bn10.pdf

SM

loglorry

7th Jan '11

Nice find SM. Seems like quite a considerable allowance then for the likes of Bentley/XEL. If they start pumping say 10K/bpd @ $90 oil (applying a 15% discount cos it is heavy) with an oppex of $37/barrel then this should produce about $400K/day in revenue or $120m=£80m/year. From my understanding then they'd be able to claim all their tax back from this.

Does this mean they'd get tax free production upto to about 20K/bpd for the first 5 years? Sounds a bit too good to be true so perhaps I've got my numbers wrong?

Log

JPGH

8th Jan '11

Log,
The relief (up to £800m or max of £160m in any year) is only deductible from SC component (20%) of the total tax bill comprising RFCT (30%) and SC. So not quite tax free but can keep Bentley or e.g. some of AEY tiddler fields paying tax at 30% (after deductions for Opex, cost of finance. Depreciation...etc) so effectively very low gov take but not quite tax free.

Would expect Bentley to be ddveloped at much higher (> 40kbopd) rates though, hardly worth developing for a paltry 20kbopd. Economics won't fly even at preferential low tax rates.

JPGH

loglorry

9th Jan '11

Thanks for clearing that up JPGH. I do agree that I think Bentley might be expensive to develope but with $80+ oil the economics seem OK to me at least if one can believe the broker reports. Also would BP/Amec really have got into the Bentley Alliance if they thought the field was uneconomic even if they got it to flow? Anyway slightly off topic for tax here.

JPGH

9th Jan '11

Log,

Also would BP/Amec really have got into the Bentley Alliance if they thought the field was uneconomic even if they got it to flow

Not sure how much BP actually spent here on Bentley studies with XEL other than some internal fees...etc. AMEC would have spent a bit but they are not fools either and again I'd say their spend was limited to a couple of thousand manhours from man/woman power resources that would otherwise have been on overhead (AMEC are not alwasy the busiest of O&G Engineering Contractors) so again not a huge capital commitment there either to date.

Even with oil at >$90/bbl Banks and larger e+p are still using considerably less ($60/bbl +/- $5/bbl) for generating robust economics so high oil price not helping XEL (just yet) when it comes to raising development finance.

I have an old model for Bressay/Mariner thats uses the older royalty/corpo tax regime that I might just dust off to see how good Bentley looks under new regime of RFCT and SC (with $800m added relief). (Project for me for Jan/Feb and will use low and high production rates to see how sensitive this all will be).

JPGH

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Tax and oil E&Ps

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Doverbeach

7 comments

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