Lobby group demands tax breaks for UK oil industry

UK Chancellor Alistair Darling must lower taxes if he wants to increase domestic production 20% over the next 5 years, warned trade body Oil & Gas UK prior to publication of the budget.

Uchenna Izundu
OGJ International Editor

LONDON, Apr. 23 -- UK Chancellor Alistair Darling must lower taxes if he wants to increase domestic production 20% over the next 5 years, warned trade body Oil & Gas UK (OGUK) prior to publication of the budget.

Darling was to unveil his plans Apr. 22. According to UK reports, he was expected to offer tax breaks to North Sea oil companies to encourage exploration and production on difficult fields.

The association representing North Sea producers and service companies is lobbying hard for tax revisions amid concerns drilling activity will drop more than 60% this year due to the credit squeeze, low oil prices, and high costs—all threatening the country's energy security.

Operators pay a 50% tax rate in the UK: a corporation tax of 30% and a supplementary tax of 20%. Mike Tholen, OGUK's economics director, said, "Delivering that extra production and consequently additional tax revenues to the treasury will require a substantial reduction in the tax burden across the range of UK oil and gas projects, including new fields and additional investment in existing fields."

OGUK members said it is imperative that the government, treasury, and industry work together to freeing up debt and credit facilities from the banks as small companies are collapsing because they cannot access funds. Projects are also being delayed or cancelled because of difficulties in obtaining finance.

The association presented three proposals to the treasury because it is worried that falling competitiveness of UK projects means investment could halve in the next 2 years from £5 billion. It has called for tax relief on exploration costs for small companies until a well is drilled, as already happens in Norway.

In Darling's November prebudget report, he offered a "value allowance" that would reduce the tax rate for small, technically challenging fields. But OGUK wants operators to use value allowance to eliminate the 20% supplementary charge on corporation tax on all new projects, thereby making North Sea investment more attractive. Thirdly, the industry is calling for the government to help with decommissioning costs because inconsistencies in its regulatory treatment are creating uncertainty.

The UK oil and gas industry meets 70% of the nation's primary energy demand, saving £40 billion a year on energy imports, according to OGUK.

As much as 25 billion bbl of oil and equivalent gas are estimated to lie in the UK North Sea, which has the potential to meet 65% of the country's oil and a quarter of its gas demand in 2020.

Contact Uchenna Izundu at uchennai@pennwell.com.

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