https://cpes.org.uk/om/files/original/538bcce361d6759df49b59c171812d80.pdf a2fd491817eb739000f7d2cef1aa558b Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Economic Policy Review Volume 3 Text A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text. Text Any textual data included in the document CHAPTER 9 THE ACCOUNTING FRAMEWORK FOR THE NORTH SEA WITH SOME NEW PROJECTIONS by Paul Atkinson Any assessment of prospects for the British economy requires taking specific account of economic transactions related to the development of the North Sea. This, however, is very difficult, due to the scarcity of data. No specific items relating to the North Sea have yet been shown in official economic statistics. It is our view that regular publication by the CSO of economic information relating to North Sea development is now overdue. The accounts below, which show CEPG estimates of historical series and projections for the period up to 1985, are modelled on the national income accounts published in the Blue Book, and are one possible format. The accounts as presented are estimates of the magnitude of income and expenditure flows deriving directly from North Sea activities. They provide a measure of the contribution of the North Sea to national income and the balance of payments as it would appear ex post in national accounts. They are not an attempt to assess the ultimate effects of North Sea activity as compared to a hypothetical situation in which North Sea oil and gas did not exist. Estimates of the latter kind would depend on numerous assumptions about how the government and the private sector might have adjusted their behaviour if no oil or gas had been discovered in UK waters. From the information presented in our accounts we can derive estimates of the impact effects of North Sea developments on national income and the balance of payments. The addition to national income consists of royalties, Petroleum Revenue Tax and Corporation Tax accruing to the government, profits due to the British National∑ Oil Company (BNOC), and profits due to the UK private sector. The addition to the current balance of payments is sales of oil and gas, less North Sea purchases from abroad, less property income paid abroad. The addition to the balance of payments on current and capital account is the addition to the current account, less depreciation allowance paid to foreign companies, plus overseas finance for North Sea development expenditures, less repayments by UK companies of overseas loans out of North Sea profits (from Table 9.2). One major reason why these estimates cannot purport to show the effect of having North Sea activity compared to an alternative position without it is that North Sea gas is sold by producers at a price very much below the cost of alternative fuel supplies. Any attempt to quantify the full effect of having the gas would require estimates of the sources and prices of alternative supplies of energy, and of the response of UK consumers of energy to the difference in prices. The real value of the gas as a substitute for alternative fuels is far higher than that shown in our accounts. Definitions Note: the value of expenditures is measured at market prices. For the past, 1966-76, values of expenditure and income are shown at current prices; for the future, 1977-85, these values are shown deflated by the rise in the domestic expenditure deflator relative to 1976 and are denoted 'in 1976 values'. The volume of expenditures and output is measured at 197{) factor cost. Volume series are denoted with a suffix A after the reference number, which relates to Table 9.3. (1), (lA) Development expenditures are the total of expenditures on goods and services for exploration, appraisal and development of the resources in the North Sea. They do not include current costs of production of oil and gas, such as platform maintenance and insurance once production is actually under way, but they do include such expenditures if incurred before production of oil or gas begins. (2), (2A), (3), (3A) Sales of oil and gas are valued at 'landed' prices. 'Oil' includes gas liquids. (4), (4A), (5), (SA) These items represent all purchases of goods and services (including employment on North Sea installations) whether for development or production activities. (6) Royalties are classified as an indirect tax. (7), (7A) Value added at factor cost is conceptually equal to gross trading profits on North Sea operations as they would be if all development expenditures were fully capitalised on the books Table 9∑1 The immediate impact of the North Sea (£ million in 1976 values) 1971 1976 1981 1985 1976-80 1981-85 Real disposable national income (of which to UK public sector) Current balance of payments .. .. .. .. Adjusted current balance of payments* Basic balance of payments . . .. 51 16 -39 -39 108 535 135 -558 -608 1,232 *This is the current balance as it would be if depreciation allowances due to foreign companies were treated as income rather than as capital flows. 84 3,738 2,648 4,279 3,873 4,918 5,167 4,492 6,668 5,850 6,139 9,333 4,849 10,945 7,634 13,205 23,321 18,829 29,377 25,494 28,802 ∑ The accounting framework for the North Sea with some new projections rather than treated as current costs for tax purposes. (8) Direct taxes are Petroleum Revenue Tax and Corporation Tax. (9) Property income due abroad is equal to gross trading profits of foreign compamies less direct taxes, less depreciation allowances due to foreign companies, plus interest paid abroad by UK companies, less interest paid by foreign companies to the UK. Since finance raised from UK banks in the Eurodollar market must (normally) be raised by UK banks from abroad, the Eurodollar market is treated as being resident abroad. (10) This is conceptually equal to BNOC's gross trading profits less direct taxes paid to the UK government, less interest paid abroad. (II) Disposable income due to the UK private sector is equal to gross trading profits of UK companies less direct taxes, less interest paid abroad, plus interest received from foreign companies. (12) Depreciation allowances due to foreign companies represent that part of North Sea income due to foreign companies which is not subject to Corporation Tax as capitalised development expenditures are written off the books. Following national income accounting conventions, these allowances are included in profits due to the UK. In the financial accounts the allowances appear as capital outflows. (13), ( 14), (15) Finance by the overseas sector is the overseas sector's share of development expenditure, plus overseas loan finance for the UK private sector and BNOC shares, less loan finance from the UK private sector and BNOC. ftems (13) and (14) are defined analogously except that financial transactions between BNOC and the UK private sector are excluded from considera- tion. rt is recognised that the conceptual basis for allocating certain tranches of finance to expenditures in the North Sea in the accounts of companies which have operations outside the North Sea is very weak. To make these items reconcile with sector capital accounts, item (12) must be added to item (13) and subtracted from item ( 15), and adjustments must be made for net loan repayments between the two UK sectors and the overseas sector. This latter item has been estimated as a net flow from the UK to overseas, but has not been broken down into components, as follows: Table 9∑2 1976 1977 1978 1979 1980 Loan repayments from UK to abroad (£mat 1976 values) 3∑0 2∑9 90∑7 106∑5 101∑4 1981 154∑6 1982 194∑7 1983 275∑7 1984 267∑9 1985 351∑2 Data sources and assumptions underlying projections The primary data, i.e. estimates of oil output, gas output, operating costs, and development expenditures in the North Sea, are based on work done by Jon Morgan and Colin Robinson at the University of Surrey, and by Martin Lovegrove at Wood-MacKenzie in Edinburgh. The estimates could also not have been pro- duced in their present form without the aid of Jon Morgan's computer model of the North Sea tax system and his willingness to modify it to accommodat CEPG assumptions. The work presented in this chapter has essentially been to set out estimates of oil and gas production together with all the related financial transactions within a single accounting framework, which is consistent with the usual national income concepts, and which can therefore be easily integrated with the rest of the CEPG model. The fundamental purpose of the exercise is to make it possible to consider the North Sea operation and the functioning of the rest of the economy separately as well as together. In the process of getting out consistent accounts significant modifications to the primary sources were made for which we take full responsibility. The main assumptions to which the calculations are sensitive are as follows: (I) Gas output is assumed to consist of gas from existing fields in the Southern basin, Brent and Frigg (UK); a small estimate is also made for other oil-associated gas and probable discoveries. Gas production is assumed to rise to a peak of 21∑8 billion therms in 1980. No allowance is made for the gas-gathering pipeline currently under consideration. (2) Oil output is assumed to come from 14 proven fields (Argyll, Auk, Beryl, Brent, Claymore, Cormorant, Dunlin, Forties, Heather, Montrose, Ninian, Piper, Thistle, and Statfjord (UK)), seventeen probable fields, unknown possible discoveries deriving from future licensing rounds, and includes a small amount of gas liquids. Oil output is assumed to reach a peak of 160∑9 million tons in 1984. (3) North Sea oil is valued at $12∑80 per barrel in 1976, is assumed to have an average price of $14∑00 in 1977, and is assumed to rise in dollar terms at 5% per annum thereafter. (4) There is assumed to be a general world dollar inflation of 5% per annum from 1976 to 1985. The UK is assumed to experience 15% inflation in 1977, 10% per annum thereafter. The dollar/ sterling exchange rate is assumed to average $1∑7941 in 1976 and adjust according to purchasing power parity thereafter. The implication of these assumptions is that the real price of oil would rise by just over 4% in 1977 and remain constant thereafter. By doing the calculations in current sterling terms the effect of UK inflation on the real value of capital allowances is fully allowed for. The price of gas is assumed to rise in line with UK inflation at 1976 values of 2∑16 pence per therm for gas from the Southern basin, 6∑95 pence per therm for gas from Frigg (UK) and 7∑63 pence per therm for Brent and 'other' gas. (5) Corporation Tax is assumed levied on sales of oil and gas less operating expenditures, less royalties (at 10% average rate), less petroleum revenue tax, less interest payments, less depreciation allowances (which are assumed carried forward if not used). Because Corporation Tax is on a corporation basis within the ring fence (assumed to apply since mid-1974), but not on a project basis, this is the most prpblematical 85 Economic Policy Review part of the exercise. Taxation of oil production by the Sheii/Esso group (Auk, Brent, Cormorant, Dunlin, Cormorant Extension, Tern), by BP (Forties, Magnus, Andrew), by the Occidental Group (Piper, Claymore) and by the Mobil Group (Beryl, West Beryl) was treated on a company basis and a 52% tax rate was assumed. The rest of the proven and probable oil fields and the Brent and Frigg (UK) gas fields were treated the impact on a project basis. To allow crudely for of deferred Corporation Tax on the field by using depreciation allowances accrued on another field, an effective corporation tax of 20% in 1978, 30% in 1979,40% in 1980, 45~;,; in 1981, and 50% thereafter was assumed, but no depreciation allowances were credited on the 'possible' discoveries tor use in deferrmg Corporation Tax. This means that in 1980 taxation of 73∑3 million tons of oil is treated properly on a corporation basis, the remaining output (30∑6 million tons) is treated on a project basis, with an assumed effective Corporation Tax rate of 40%. Corporation Tax is assumed to be paid in the final quarter of the government's financial year immediately following the calendar year in which the relevant production took place. Thus there is a 2-year lag on a calendar year basis. Table 9.3 North Sea ac~ounts £million Re erence Number 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 At 1970 Factor Cost Development Expenditures . . (lA) 22 69 72 86 63 68 98 89 183 446 Sales of Gas . . (2A) 2 7 18 41 67 98 107 129 132 Sales of Oil . . (3A) 10 less Purchases from UK (4A) 7 21 23 31 26 31 46 45 77 212 less Purchases from Abroad (5A) 15 48 50 61 46 51 73 67 134 287 Value added at Factor Cost* (7A) 2 6 12 32 53 77 84 101 109 At Current Prices Development Expenditures . . (I) 19 64 69 85 67 81 128 155 473 1551 Sales of Gas . . (2) 4 12 23 49 80 116 138 202 245 Sales of Oil (3) 59 Jess Purchases from UK (4) 6 19 22 28 28 37 60 72 179 681 less Purchases from Abroad (5) 14 45 49 60 49 60 95 115 340 946 less Royalties . . (6) 1 2 5 8 12 14 20 30 Value Added at Factor Cost∑ . . (7) 3 9 17 35 56 77 92 135 198 Allocation of Factor Income at Current Prices Direct Taxes paid to U.K. Government Property Income paid Abmad Disposable Income due BNOC Disposable Income due UK Private Sector Depreciation Allowances due Foreign Companies Value Added at Factor Cost* . . (8) (9) (10) (II) (12) (7) 3 9 24 39 53 64 95 152 3 7 8 10 17 24 28 40 40 7 3 9 17 35 56 77 92 135 198 North Sea Capital Account at Current Prices Development Expenditures (l) 19 64 69 85 67 81 128 ISS 473 1551 Financed by UK Private Sector (13) 14 9 23 29 21 9 47 79 128 308 Financed by BNOC . . (14) Financed by Overseas Sector (15) 5 55 46 56 46 72 81 76 345 1243 *Totals may not add due to rounding. 86 The accounting framework for the North Sea with some new projections Other assumptions of lesser importance are as follows: (6) All companies are assumed to finance 20% of their development with equity capital and 80% with loan capital. Foreign companies are assumed to be financed 100% from abroad. UK companies, including BNOC, are assumed to raise half their loan finance in the UK and half abroad. Interest is paid at 12% per annum. Before production begins it is rolled over and capitalised. Interest payments begin when production begins. Loan repayment begins the year before peak production and full amortisation takes seven yeats. (7) BNOC is assumed to have fully acquired the National Coal Board holdings in Statfjord (UK), Murchison, and Hutton, and also the Burmah holdings in Thistle and Ninian. BNOC is also assumed to have a 51 %share in all future licens- ing rounds. No account is taken of option-to-buy participation arrangements. Because of complications in the calculations, the BNOC take is net of direct taxes on its existing holdings but gross on future discoveries. (8) 80% of operating costs are assumed to be paid to the UK, 20% abroad. Development expenditures are assumed to be paid 70% abroad until 1974, falling to 40~~ in 1980 and 30% by 1985. At 1970 Factor COst Development Expenditures .. Sales of Gas .. Sales of Oil less Purchases from UK less Purchases from Abroad Re erence Number 1976 (lA) (2A) OAJ (4A) (SA) 500 146 85 258 314 Value Added at Factor Cost∑- .. At 1976 Values Development Expenditures .. Sales of Gas .. Sales of Oil less Purchases from UK less Purchases from Abroad less Royalttes .. (7A) (I) (2) (3) (4) (5) (6) 159 2232 324 697 1089 1388 102 Value Added at Factor Cost∑ .. (7) 674 Allocation of Factor Income at 1976 values Direct Taxes paid to UK Government Property Income paid Abroad Disposable Income due BNOC Disposable Income due UK Private Sector Depreciation Allowances due Foreign Companies Value Added at Factor Cost* .. (8) (9) (10) (II) (12) (7) 33 191 400 50 674 North Sea Capital Account at 1976 values Development Expenditures .. Financed by UK Private Sector Financed by BNOC .. Financed by Overseas Sector (I) (13) (14) ( 15) 2232 295 94 1843 *Totals may not add due to rounding. 1977 323 160 236 229 199 291 1460 369 2008 954 881 238 1764 80 252 6 891 535 1764 t4cO 159 126 1175 1978 230 177 417 237 145 442 1043 494 3498 957 640 399 3038 321 798 63 1090 766 3038 1043 155 49 839 1979 1980 1981 1982 260 318 338 357 198 213 206 J97 ~55 664 751 841 289 351 400 442 153 167 175 183 571 677 720 770 1185 659 4718 1194 676 538 4155 1463 809 5696 1490 749 650 5079 1554 796 6458 1690 796 725 5598 1632 774 7204 1883 810 798 6118 794 1138 168 1010 1045 4155 1202 1614 255 1093 915 5079 1601 2179 322 1090 406 5598 2164 1994 331 1043 586 6118 1185 1463 1554 1632 198 291 208 222 62 78 146 238 925 1094 1200 1172 1983 293 189 928 428 159 823 1329 746 7915 1788 716 866 6620 2821 1595 377 831 996 6620 1329 187 254 888 £million 1984 1985 241 180 1029 419 141 248 171 1018 436 140 !!90 861 1084 703 8701 1728 632 940 7188 1100 660 8464 1783 626 912 6903 2921 1866 471 853 1077 7188 3045 1830 535 675 818 6903 1084 1100 156 157 275 303 653 640 87  Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Chapter 9 The Accounting Framework for the North Sea with Some New Projections Creator An entity primarily responsible for making the resource Paul Atkinson Source A related resource from which the described resource is derived Economic Policy Review Volume 3, pages 84 - 87 Date A point or period of time associated with an event in the lifecycle of the resource March 1977