Chancellor sets out "major" tax allowances for oil and gas producers

Out-Law News | 21 Mar 2012 | 5:13 pm | 1 min. read

The Government is to bring forward a package of tax measures aimed at securing billions of pounds worth of investment in oil and gas production.

In particular, a "new field allowance" worth £3 billion will enable oil excavation west of Shetland, described by the Chancellor of the Exchequer as "the last area of the basin left to be developed".

The amount and scope of the existing "small field" allowance will also be extended, and the amount of tax relief due to oil and gas producers when their facilities are decommissioned set out contractually to offer them "long term certainty".

In his 2012 Budget (114-page / 707 KB PDF), George Osborne recognised that "gas-fired electricity will continue to play a major role in UK energy supplies over the next decade and beyond".

However, the Treasury confirmed that "clean energy" remained one of its priorities under the National Infrastructure Plan.

Osborne also confirmed that the Government would publish its long-term "strategy for gas generation" later this year. Energy Secretary Ed Davey announced that measures would be included in the Government's forthcoming Electricity Market Reform (EMR) legislation to provide long-term certainty to gas investors earlier this week.

The Government will introduce legislation in the 2013 Finance Bill giving it the authority to enter into contracts with companies operating in the UK and the UK Continental Shelf. These contracts will "provide assurance" on the tax relief those companies will receive when decommissioning their assets, it said.

In addition to the new £3bn field allowance aimed at encouraging investment in "particularly deep fields with sizeable reserves" in the Shetland area, the Government will increase its allowance for small fields to £150 million.

The maximum allowance will now apply to fields producing less than 6.25m tonnes of oil, tapering to no allowance for fields producing more than 7m tonnes of oil. The amount of the field allowance is deducted from a company's adjusted ring fence profits before it has to pay tax.

Industry body Oil and Gas UK was quick to welcome the announcements, which its chief executive Malcolm Webb said had come as a result of industry lobbying.

"The introduction of legislation to enable the Government to give the industry certainty on tax relief on decommissioning costs is a very significant step forward," he said. "The measure should delay decommissioning of oil and gas infrastructure, give rise over time to up to £40bn of extra investment and result in the recovery of an additional 1.7 billion barrels of oil and gas. The Exchequer could receive an extra billion pounds of tax revenues in the first five years alone."