Impact case study database

Research at the University of Aberdeen, led by Professor Kemp and colleagues Linda Stephen and Sola Kasim has provided valuable, impartial evidence to inform the long-standing debate on North Sea oil economic and taxation issues, which have impacted the growth, decline and diversity of the UKCS. From 2005-2014, key research published by Kemp, Kasim and Stephen highlighted the looming problem of maturity and the need to re-engineer the tax system to be more relevant for smaller fields with lower materiality and thus lower taxable capacity, affecting economic recovery, job security and investment. Their research highlighted the likelihood of falling future production, modest levels of exploration activity, limited numbers of new field developments and increasing numbers of undeveloped proven discoveries. The Scottish Government published “UK Continental Shelf Tax Regime – Options for Reform”. This referenced Professor Kemp’s major contribution to thinking on the subject and his influence continued through his appointment as a member of the Scottish Government’s independent Oil and Gas Expert Commission. Their report, published in 2014, was entitled “Maximising the Total Value Added (including the supply chain)”. This emphasis has been increasingly recognised by the Scottish Government and the OGA in recent years.

In late 2014, the UK Government acknowledged the problem outlined by Kemp and his team and issued a review of the oil and gas fiscal regime on the possible long-term tax structure [S1]. This included reference to the need to reduce effective headline rates and to introduce investment allowances to facilitate maximum economic recovery, as outlined by Kemp and colleagues. Professor Kemp was asked to give a presentation entitled “Modelling the Future of the UKCS” to a visiting group to Aberdeen from HMRC/HMT/DECC in August 2014. In 2015, the Investment Allowance for supplementary charge (SC) was introduced by the UK Government, and in 2016, the rate of SC was reduced; both changes were based on Kemp’s findings [S2].

HMT subsequently instigated a consultation on the possibility of a Transfer of Tax History to facilitate late life asset transactions. Kemp and Stephen produced evidence that, in the absence of TTH, late life asset transactions could be inhibited because the remaining return (net present value) to the prospective seller could exceed the prospective return to the buyer due to ineffective tax relief for decommissioning costs. When the Treasury was studying the evidence on the case for Transfer of Tax History, HMT representatives visited Professor Kemp on 31^st July 2017 to discuss his submission on the subject. The Treasury acknowledged Professor Kemp’s contribution and Transfer of Tax History was subsequently enacted. In 2018, a TTH mechanism was introduced for UK oil and gas producers, for deals that complete on or after 1 November 2018, allowing companies selling UKCS oil and gas fields to transfer some of their tax payment history to the buyers of those fields [2] [S3].

During this period of transition, Kemp and his team’s research informed key debates in the House of Commons (2015-2016). Kirsty Blackman MP stated that, based on Kemp’s research, the proposed changes did not go far enough to facilitate the development of the many marginal fields [S4]. Hannah Bardell MP [S5] also supported the view expressed by Professor Kemp on two separate occasions stating that further reforms were clearly necessary [4]. Mike Weir MP in the House of Commons expressed support for a reduction in the SC as suggested by Professor Kemp [S6].

Further evidence of the impact of Professor Kemp’s and his team’s research was the invitation by the House of Commons Committee on Scottish Affairs for him to provide written and oral evidence relating to their inquiry on “The Future of the Oil and Gas Industry”. His written evidence, was sent on 5^th June 2018, entitled “The future of the UK Oil and Gas Industry”, Memorandum to House of Commons Select Committee on Scottish Affairs, and he was invited to give oral evidence. “The future of the UK Oil and Gas Industry”, Oral Evidence to the House of Commons Select Committee on Scottish Affairs was published on 25^th June 2018. His views on future prospects were quoted in the report of the Committee published on 4^th February 2019 “The future of the Oil and Gas industry”; Sixth Report of Session 2017-19.

In 2017, the OGA produced a consultation on what constitutes “a satisfactory expected return” in the UKCS. Kemp and Stephen undertook a study to examine OGA’s proposed discount rates and investment hurdles [S7] and their findings pointed to the need for discount rates to be higher than OGA’s suggested levels. They also emphasised the importance of capital rationing in the industry and the need for it to be considered as a central element in understanding investment hurdles. The OGA, post-consultation, agreed that discount rates in the range suggested by Professor Kemp were realistic. The OGA also agreed that use of the ratio NPV/I to determine hurdle rates was also appropriate [S8-9].