Government Implements Hire Cap and Ring Fence: Puts Jobs and New Revenues at Risk
Aberdeen, Scotland, 19 March, 2014 – International Association of Drilling Contractors (IADC) Executive Vice President Taf Powell issued the following statement in response to the 2014 Budget Statement on Bareboat Chartering announced today by the Chancellor of the Exchequer.
“IADC and its member companies are deeply disappointed that the government has decided to proceed with measures targeting drilling rigs and accommodation vessels for additional tax. We believe this is not sustainable to our industry and will cause the UK offshore sector to shrink; overall we think the costs to the UK economy will be higher than the immediate extra tax revenues forecast by these measures.”
“The measures are directed at companies moving significant taxable profits from the UK. This fails to take into account that the share received by drilling rig owners from UK operations represents only a 6% return on current capital investment of roughly £100bn in new rigs, and that it takes upwards of 15 years to break even on their investment. Profits earned in the UK are currently subject to corporation tax, and the employment and consumption of goods and services by this sector directly benefit the UK economy.”
“The tax-raising measures invalidate existing pricing agreements between drilling contractors and HMG, and the additional costs will render some UK projects uneconomic. In addition, where the additional costs cannot be passed on to the client, rigs may be withdrawn from the UK, and new North Sea class rigs intended for the UKCS will be diverted to countries where economic returns are more predictable.”
“We find it a surprise that the government on the one hand announces a fundamental fiscal review of the UKCS whilst on the other hand makes a pre-emptive tax move targeting solely the drillers and accommodation providers that are the life blood of the UKCS. Such a move is at odds with the assertion that the government is looking to stimulate activity and growth on the UKCS,” said Mr. Powell. “Drilling rigs are inherently mobile; and drilling contractors are inherently international. Drilling companies, many of them having recently installed their headquarters in the UK, are now considering the options for their businesses due to this latest example of fiscal instability that undermines claims that the UK is open for business.”
Note to Editors:
IADC is the international association of drilling contractors. It has 1,974 member companies worldwide, including major oil companies, and suppliers. It is expanding rapidly, though remains a not-for-profit association acting solely for the benefit of its member companies in giving leadership to the worldwide drilling industry. IADC is based in Houston with offices all over the world, including the UK.
A number of global drilling companies have relocated to the UK and the measure of a ring fence on profits announced today penalizes them compared to other UK companies that are less specialised, and worse off than if they had stayed in the USA or elsewhere
The drilling sector is the vital component in an active offshore industry – oil and gas may only be found and produced by drilling wells and repairing them. Only the drilling contractors build and operate the rigs that drill and repair wells. Investment in the 220 rigs currently being built represents an investment of up to £100bn. Drillers have more capital risk exposure than oil and gas producers, with no access to production profits.
Bareboat chartering is the international leasing system for mobile vessels such as drilling rigs, diving support ships and crane barges. The owner of the vessel is located in one location but leases its vessels to operating entities within the same corporate group, on a bareboat basis (i.e. with no crew) in many other locations, often on a temporary basis. The operator of the vessel pays a lease charge to the owner, which is discounted from revenues he earns from the client oil company for whom he drills wells. The amount of the lease is agreed in 5 yearly Advanced Pricing Agreements with government officials. This is an international system, endorsed by the UK government in 2008.
APA negotiations that have taken place for the past 40 years in the UK and other countries have led to a consensus as to how much profit should be taxed and where. All existing APA’s are rendered defunct from 1 April 2014 by these measures; notwithstanding the fact that they are the basis of contracts between rig operators and their clients.
The measures announced in the budget are as follows:
Whilst it announced a major change to the fiscal regime the government also announced full implementation of Sir Ian Wood’s final report: “UKCS Maximising Recovery Review” and a concomitant fundamental review of the UKCS fiscal regime.
IADC is dedicated to enhancing the interests of oil-and-gas and geothermal drilling contractors worldwide. IADC’s contract-drilling members own most of the world’s land and offshore drilling units and drill the vast majority of the wells that produce the planet’s oil and gas. IADC’s membership also includes oil-and-gas producers, and manufacturers and suppliers of oilfield equipment and services. Founded in 1940, IADC’s mission is to improve industry health, safety and environmental practices; advance drilling and completion technology; and champion responsible standards, practices, legislation and regulations that provide for safe, efficient and environmentally sound drilling operations worldwide. IADC holds Accredited Observer status at the International Maritime Organization and the International Seabed Authority, specialized agencies of the United Nations. The Association is a leader in developing standards for industry training, notably its Well Control Accreditation Program (WellCAP)® and rig-floor orientation program, RIG PASS®. IADC is headquartered in Houston and has offices in Washington D.C., the Netherlands, Thailand, and the United Arab Emirates, as well as chapters in the UK, Venezuela, Brazil, Australasia, South Central Asia, Southeast Asia, the Middle East and across the United States. For more information, visit the IADC website at www.iadc.org.