THE UK PETROLEUM FISCAL SYSTEM IN RETROSPECT

This paper examines the performance of the UK petroleum fiscal system introduced in 1975 from the viewpoint of a mechanism designed to collect economic rents. The many changes in the period to the early 1980's made the system less well-targeted in economic rents and could have caused investment disincentives. The subsequent changes to a more profit-related basis generally produced an economically more efficient system. The number of changes were excessive and were motivated by short term revenue considerations. Conceptually PRT is a tolerably appropriate instrument to collect economic rents but the specific one introduced in the UK has unnecessary complexities. The safeguard could have been omitted. The package of changes introduced in 1983 led to exploration effectively being subsidised. Some restriction crossfield exploration relief, say to a contract area basis would have mitigated the problem. The removal of PRT on new fields in 1993 while increasing UK competitiveness also increase political risk. The multi-tier system may distort investment decisions. The decision to levy PRT on tariff income was probably justifiable in the early 1980's but with increased competition among asset owners and the non-level playing field its continuation for new contracts is open to question.