Oil experts in call for transitional relief

disruption in the exploration sector and seriously affect investor

confidence, according to a group of the most respected analysts in the

industry.

Transitional relief, they suggest, would help prevent exploration

activity plummeting and would also foster medium-term confidence.

In an 81-page investigation of the 1993 Budget proposals on oil and

gas on the UK Continental Shelf, Professor Alex Kemp, Mr David Rose, Ms

Mary Hovring, and Mr David Reading of Aberdeen University Petroleum and

Economic Consultants say they will have major consequences.

''Exploration companies, particularly the small ones, have based their

exploration and appraisal programmes on the basis of receiving full

Petroleum Revenue Tax relief for the expenditures,'' they say.

''They can react in the short term only by sharply cutting their

exploration and appraisal activities. The result will be highly

disruptive for the drilling, contracting, and supplies industries which

are already suffering from trading difficulties.''

The medium-term exploration effort of the smaller companies could also

be put in jeopardy.

They say transitional relief could help companies by giving them time

to adjust their budgets and plans to the new fiscal situation and avoid

''a precipitous fall in exploration''.

''The simplest form of transitional relief would be to allow a

specified proportion of exploration and appraisal costs to be allowed

against PRT for a limited period of time.''

The report suggests that the level of allowable deduction should be

set at a level which would prevent the plummeting of exploration but

would not create a major boom in exploration and appraisal activities in

the short term.

They suggest an alternative of a combination of transitional relief

plus a gradual downward phasing of the PRT rate from 75% to 50% which

would be less expensive in terms of tax revenues lost, but would be much

more controversial because there would be lower benefits to owners of

existing fields during the transition period.

''The scheme of transitional relief for exploration and appraisal

expenditures on its own has the merit of simplicity,'' they suggest.

''The cost of the scheme to the Exchequer to procure the desired

effect of preventing a plummeting of exploration in the short term would

be small. The benefits to the economy of the UKCS in the short and

longer term would be substantial both in preventing a major fall in

exploration and appraisal activity and in promoting longer-term investor

confidence.''

According to the analysts an economically more effective mechanism to

reduce significantly the tax-take on mature fields would be to abolish

royalties on these fields and combine this with a reduction in the PRT

rate.

''This would have been more consistent with the overall evoltion of

tax policy in the 1980s which saw the abolition of royalties firstly for

new fields in central and northern water and subsequently for the

southern gas basin.

''In this respect the Budget proposals are not very consistent with

the previous major changes made. An entirely profit-related system is

best able to ensure that maximum economic recovery is obtained from the

mature fields. The likelihood is that attention will have to be given to

this issue in the future.''