The 1993 budget has dramatically changed the fiscal situation applied to petroleum exploitation in the UKCS. The changes substantially impact on all aspects of the upstream business.
On existing producing fields and those under development there is a marked positive effect on industry net cash flows from the reduction in the rate of Petroleum Revenue Tax (PRT) from 75% to 50%. On discoveries not yet developed the abolition of PRT does not change the effective tax take on production income on the majority of fields as the existing allowances already provide effective tax shelter. On the large fields the tax take can go down substantially. On the other hand the net of tax appraisal costs on new prospects increase fourfold.
The post-tax returns on incremental investments in mature fields are increased significantly by the reduction in the PRT rate.
The removal of the PRT crossfield allowance for exploration and appraisal clearly has an adverse effect on exploration incentives, but the fiscal situation facing an explorer is now very simple, and the level of tax take very low by international standards.
The imposition of the Gas Levy and PRT on new gas contracts or on incremental investments in mature gas fields can readily render such projects non-viable. The precise impact of PRT depends critically on what PRT volume allowance is available for the project in question.