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Posted on 22 April 2014

IADC responds to 2014 budget statement regarding bareboat chartering

In a press release issued on 19 March, IADC Executive Vice President Taf Powell issued a statement in response to the 2014 Budget Statement on Bareboat Chartering.

It reads: “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 a current capital investment of roughly £100 billion 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 (Her Majesty’s Government), 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 In addition, where the additional costs cannot be passed on to the client, rigs may be withdrawn from the UK, and new North Sea-class rigs intended for the UKCS will be diverted to countries where economic returns are more predictable.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.

“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.”

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 earned from the client oil company for whom the wells are drilled. The amount of the lease is agreed in five yearly Advanced Pricing Agreements (APA) 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 APAs 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: 

• 2.138, Oil and Gas Bareboat Chartering – As announced at Autumn Statement 2013, the government is concerned about the use of specialized lease payments, known as bareboat charters, to move significant taxable profit outside the UK tax net and has been holding informal discussions with industry. The government will cap the amount deductible for these intra-group lease payments by companies that provide drilling services or accommodation vessels on the UKCS. The cap will be 7.5% of the historical cost of the asset subject to the lease, increased from the 6.5% cap previously announced at Autumn Statement. The government will also introduce a new ring fence to protect the resulting revenue. The changes will apply from 1 April 2014. The government will review the impact of the measure following its first year of operation. (Finance Bill 2014) (28) (v) (page 75 of the report). 

• On page 58 of its report, Table 2.2 predicts the five-year tax take of these measures to be £570 million, with £145 million coming in the first year. The government expects these costs to be passed through to the oil and gas companies, therefore raising the operating costs for the UKCS as a whole.

While it announced a major change to the fiscal regime, the government also announced full implementation of Sir Ian Wood’s final report, “UKCS Maximizing Recovery Review” and a concomitant fundamental review of the UKCS fiscal regime.

IADC urges action on proposed vessel discharge legislation 

IADC, along with more than 50 organizations, submitted a letter in support of vessel discharge regulation reform to US Sen. Jay Rockefeller IV, D-W.Va., Chairman of the Committee on Commerce, Science and Transportation, and US Sen. John Thune, R-S.D., ranking member on the committee. The committee was urged to mark up and report out S 2094, the Vessel Incidental Discharge Act. It would establish nationally uniform and environmentally sound standards for ballast water and other vessel discharges. The proposed legislation would establish a uniform, science-based federal framework for the regulation of ballast water and other vessel discharges that is good for the maritime transportation industry.

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