UK proposes tax breaks for North Sea marginal fields

The UK is proposing a tax break from next year for marginal fields in the North Sea to stimulate investment as falling oil prices and a shortage of finance jeopardize development.

Uchenna Izundu
International Editor

LONDON, Dec. 1 -- The UK is proposing a tax break from next year for marginal fields in the North Sea to stimulate investment as falling oil prices and a shortage of finance jeopardize development.

UK Chancellor Alistair Darling launched a consultation document on the fiscal regime for the North Sea as he unveiled his prebudget report for the nation that critics have warned would bring the country's borrowing to £118 billion.

The Treasury has suggested creating a "value-based allowance," which would offer a tax rate cut for those fields "most in need of assistance." It has not yet decided how the allowance will be targeted. Currently the tax rate is 50%.

Boosting domestic production is a key issue for the government, which wants to enhance the nation's future energy supply security. The Treasury said it estimated there was 17-20 billion bbl of oil left to recover from the North Sea.

It will not offer a general tax cut for North Sea operators or a universal tax relief on their investment, describing this as a "blunt instrument" that would not encourage development of the oil and gas fields that most need it.

Trade association Oil & Gas UK (OGUK) welcomed the announcement because high oil prices had not stimulated investment in several North Sea fields, which has exacerbated the UK's production decline rate. It urgently called for incentives to reverse the decline.

OGUK Chief Executive Malcolm Webb said the tax break "if of the right size and structure, could make a material difference to the future of the North Sea."

Julian Small, the UK and global oil and gas tax leader at consultancy Deloitte, said the changes "were more far-reaching than anticipated, with the proposed value allowance and chargeable gains change potentially very welcome to maximize the value of the North Sea, in a period of declining oil prices."

The government said it wanted to simplify the Petroleum Revenue Tax (PRT) that applies to fields developed before 1993. Operators have complained about its complexity and application in different scenarios. The government has acknowledged that it could be abolished but has not formulated a strategy to do so.

Other problems with the application of the PRT relate to its inconsistencies with decommissioning liabilities. "Decommissioning rules for both PRT and corporation tax will be amended, if necessary, to ensure that full relief is given for PRT and ring fence corporation tax even after a change of use [in North Sea infrastructure]," the Treasury added.

The Treasury also suggested reducing or eliminating tax on changes of North Sea infrastructure use and recommended introducing tax exemptions on oil license swaps. In addition it will look at the fiscal regime for coalbed methane extraction.

In previous budgets, the government imposed surprise tax increases on the industry, which operators said made it challenging to do business on the UK continental shelf. In 2005, the supplementary tax charge on North Sea revenues was doubled to 20%.

Ernst & Young tax partner Derek Leith said the recent slump in oil price may have dampened the government's appetite or, more positively, it may be that Treasury recognizes the importance of the oil and gas industry to the UK economy "in terms of preserving security of supply, maintaining jobs, and generally ensuring that the country's mineral assets can be exploited to the maximum benefit."
Stakeholders are to submit comments on the measures by Feb. 13, 2009, and the new regime will be announced in the government's 2009 budget.

Contact Uchenna Izundu at uchennai@pennwell.com.

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