Redesigning Petroleum Taxation : Aligning Government and Investors in the UK.

197 Pages·2018·4.72 MB·English

by  Üşenmez

Redesigning Petroleum Taxation
Since its inception some 40 years ago, petroleum-specific taxation in the UK has been
subjecttonumerousmodifications.Oftenthesemodificationswerebroughtintoplacenot
only to sufficiently incentivise the investors but also to capture a fair share for the
government.However,itisevidentfromthefrequencyofchangesthatfindingtheright
balance between these two aims is no easymatter. Such a balance, and the consequent
fiscalstability,isnecessaryforthelong-termrelationshipbetweenthepartiestoendureto
theirmutualbenefit.Still,itdoesnottakemuchforoneorotherpartytofeelthattheyare
outofbalance.Asaconsequence,onepartyfeelsthattheotherpartyistakinganundue
proportionofthevaluegeneratedandthattheyarelosingout.
Yet achieving that balance and fiscal stability is possible. To understand this
possibility, this book first clarifies what is meant by sufficient incentivisation and fair
share before developing a new fiscal system that manages this balance and stability.
Suchclarificationyields objective criteria againstwhichtoassessnotonlythe existing
regime,butalsothenewlyproposedregime.Thisapproachisfurthercomplementedby
the critical analysis of the fiscal legislative framework and the evaluation of the legal
positions of specific contractual elements and mechanisms found within that frame-
work. This latter analysis is important in order to reduce the legal uncertainty such
elements may create, which can otherwise lead to further reactive amendments and
revisions tothefiscal regimeinthe future.
EmreÜşenmez isapetroleumeconomistandalegalexpertintheupstreamoilandgas
sector.HeisaSeniorLecturerinFinanceattheUniversityofAberdeen’sAFGCollege
andaSeniorLecturerinLawattheUniversityofAberdeenLawSchool.UntilAugust
2018healsoservedasDeanforInternationalisationfocussingonChinaandEastAsiaat
theUniversityofAberdeen.HeisalsoanassociateattheAberdeenEnergyInstituteand
AberdeenUniversityCentreforEnergyLaw(AUCEL).PriortojoiningtheUniversityof
Aberdeen, he worked in the natural resources sector in Azerbaijan and has significant
experience working with the staff of national ministries, and state and private oil
companiesaroundtheworld.
He is a Fellow of the Higher Education Academy and holds a PhD in Economics,
FinanceandLaw,anMScinPetroleum,EnergyEconomicsandFinance,andanLLMin
Oil&GasLawfromtheUniversityofAberdeen.HealsoholdsaBScinEconomicsand
aBAinPoliticalSciencefromNorthCarolinaStateUniversity.
Routledge Explorations in Environmental Economics
Edited by Nick Hanley, University of Stirling, UK
48 TheImpactofClimatePolicyonEnvironmentalandEconomicPerformance
Evidence from Sweden
Rolf Färe, Shawna Grosskopf, Tommy Lundgren, Per-Olov Marklund and
Wenchao Zhou
49 Economics of International Environmental Agreements
A Critical Approach
Edited by M. Özgür Kayalıca, Selim Çağatay and Hakan Mıhçı
50 Environmental and Economic Impacts of Decarbonization
Input-Output Studies on the Consequences of the 2015 Paris Agreements
Edited by Óscar Dejuán, Manfred Lenzen and María-Ángeles Cadarso
51 Advances in Fisheries Bioeconomics
Theory and Policy
Edited by Juan Carlos Seijo and Jon G. Sutinen
52 Redesigning Petroleum Taxation
Aligning Government and Investors in the UK
Emre Üşenmez
53 National Pathways to Low Carbon-Emission Economies
Innovation Policies for Decarbonizing and Unlocking
Edited by Kurt Hübner
54 The Economics of Renewable Energy in the Gulf
Edited by Hisham M. Akhonbay
For more information about this series, please visit www.routledge.com/series/
REEE
Redesigning Petroleum
Taxation
Aligning Government and Investors in
the UK
ş
Emre Ü enmez
Firstpublished2019
byRoutledge
2ParkSquare,MiltonPark,Abingdon,OxonOX144RN
andbyRoutledge
711ThirdAvenue,NewYork,NY10017
RoutledgeisanimprintoftheTaylor&FrancisGroup,aninformabusiness
©2019EmreÜşenmez
TherightofEmreÜşenmeztobeidentifiedasauthorofthisworkhas
beenassertedbyhiminaccordancewithsections77and78ofthe
Copyright,DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthisbookmaybereprintedorreproduced
orutilisedinanyformorbyanyelectronic,mechanical,orothermeans,
nowknownorhereafterinvented,includingphotocopyingandrecording,
orinanyinformationstorageorretrievalsystem,withoutpermissionin
writingfromthepublishers.
Trademarknotice:Productorcorporatenamesmaybetrademarksor
registeredtrademarks,andareusedonlyforidentificationandexplanation
withoutintenttoinfringe.
BritishLibraryCataloguing-in-PublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
LibraryofCongressCataloging-in-PublicationData
Acatalogrecordhasbeenrequestedforthisbook
ISBN:978-1-138-21996-0(hbk)
ISBN:978-1-315-41409-6(ebk)
TypesetinTimesNewRoman
byIntegraSoftwareServicesPvt.Ltd.
VisittheeResources:https://www.routledge.com/9781138219960
Contents
Listofcharts vi
Listoftables vii
Listofabbreviations viii
Listofcases x
Listoflegislations xii
Listofparliamentarydebates,officialdocuments
andpolicypapers xiv
1 Introduction 1
2 Government’srationaleforfiscalreform 6
3 TheUKCSfiscalregimepriortothefiscalreviewandthe
caseforitsreform 47
4 Thepost-fiscalreviewreforms 105
5 ThenewUKCSfiscalregime:aproposalforreform 130
6 Conclusion 161
Appendix 167
Bibliography 168
Index 175
Charts
2.1 UKannualpetroleumproduction 7
2.2 Economicrentanddifferentsupplypricesofinvestmentin
theupstreamsector 16
2.3 Maximumcashexposure 23
2.4 RelationshipbetweenNPV&IRR 31
4.1 Influencediagram 112
4.2 Annualaverageproductionprofiles 113
4.3 Post-taxrealP/Iratios&realIRRsunderthebasecasescenarios 116
4.4 ResponseoftheUKCStaxregime:existingtaxpayer 118
4.5 ResponseoftheUKCStaxregime:newentrant 119
4.6 Tornadodiagrams 123
5.1 Browntax 131
5.2 Post-newtaxsystemrealP/Iratios&realIRRsunderthebase
casescenario 148
5.3 Responseoftheproposedtaxregime 150
A.1 HistoricalBrentspotFOBprices 167
Tables
3.1 RFCTcalculation 51
3.2 HypotheticalapplicationoftheATLcredit 60
3.3 PRTcalculation 71
3.4 Assessableprofitscalculation 72
3.5 Safeguardcalculation 80
4.1 Operationalconditionsforthebasecasescenarios 111
4.2 Phasingofthedevelopmentcostcomponents 111
4.3 Valuesofvariablesforsensitivityanalyses 114
4.4 BasevaluesofvariablesforMonteCarloanalysis 121
5.1 MonteCarloresultsforstochasticoilprices 151
5.2 MonteCarloresultsforallvariablesstochastic 152
Abbreviations
ACE AllowanceforCorporateEquity
ATL AbovetheLine(Credit)
BOE BarrelofOilEquivalent
BT BrownTax
CA CourtofAppeals
CAA ClusterAreaAllowance
CAPEX CapitalExpenditures
CBIT ComprehensiveBusinessIncomeTax
CFD ContractforDifferences
CGT CapitalGainsTax
CIT CorporateIncomeTax
CT CorporationTax
DCF DiscountedCashFlow
DECC DepartmentofEnergyandClimateChange
DRD DecommissioningReliefDeed
E&A ExplorationandAppraisal
E&P ExplorationandProduction
ECJ EuropeanCourtofJustice
EES ExplorationExpenditureSupplement
EMV ExpectedMonetaryValue
EMV/I ExpectedMonetaryValue/InvestmentRatio
EOR EnhancedOilRecovery
FOB FreeonBoard
FPSO FloatingProductionStorageandOffloading
FV FutureValue
HMRC HerMajesty’sRevenueandCustoms
HP/HT HighPressure/HighTemperatureoilfield
HRIT HigherRateofIncomeTax
IA InvestmentAllowance
IASB InternationalAccountingStandardsBoard
IOR ImprovedOilRecovery
IRR InternalRateofReturn
IT IncomeTax
Abbreviations ix
MEA MineralExtractionAllowance
MERUK MaximumEconomicRecoveryfromtheUK
MER MaximumEconomicRecovery
MOD MoneyoftheDay
NPV NetPresentValue
OGA OilandGasAuthority
OPEX OperatingExpenditures
P/I Profit/InvestmentRatio
PPT ProgressiveProfitsTax
PRT PetroleumRevenueTax
PSA ProductionSharingAgreement
PV PresentValue
R&D ResearchandDevelopment
RFCT RingFenceCorporationTax
RFES RingFenceExpenditureSupplement
ROI ReturnonInvestment
RRT ResourceRentTax
SC SupplementaryCharge
TRA TariffReceiptAllowance
Ts&Cs TermsandConditions
uH Ultra-heavyoilfield
uHP/HT Ultra-highpressure/hightemperature
UK UnitedKingdom
UKCS UnitedKingdomContinentalShelf
USD UnitedStatesDollar
VAT ValueAddedTax
WACC WeightedAverageCostofCapital