Energy firms announce £6bn worth of investment following new UK Budget field allowances

Out-Law News | 26 Mar 2014 | 9:41 am | 2 min. read

The first new oil and gas exploration projects to take advantage of new field allowances announced by the UK government could lead to £6 billion worth of investment and the creation of more than 700 jobs, the firms behind the proposals have announced.

Maersk Oil and BG Group are the first companies to announce projects which, if approved, would take advantage of the new allowance for ultra high pressure high temperature (HPHT) fields, announced as part of last week's Budget. The new allowance was created following industry expert Sir Ian Wood's recommendations for maximising economic production of oil and gas.

"BG Group welcomes the new proposals which improve the prospect of the Jackdaw gas discovery being developed," said Andy Samuel, the managing director of BG's European upstream business. "If approved, Jackdaw would make a significant contribution to UK gas security of supply, support thousands of UK-based engineering and construction jobs and help develop highly technical skills for many UK companies."

HPHT fields pump oil and gas at extreme pressure and high temperatures, making them technically difficult and more expensive to exploit. According to the 2014 Budget document, the government will consult on the details of the new allowance shortly but it will be designed to encourage exploration across the central North Sea as well as big development projects. Developers will receive at least £200 million in tax relief for every £1bn they spend on eligible projects.

The government has already introduced a number of incentives intended to boost production in areas of harder-to-exploit oil and gas reserves. According to industry body Oil and Gas UK, around £7bn of the £14.4bn invested in the oil and gas industry last year was directly incentivised by new allowances including those for work in large shallow-water gas fields and older 'brownfield' sites. In addition Decommissioning Relief Deeds, introduced as part of the 2013 Budget to give businesses certainty over the tax relief that they will receive when decommissioning their assets, is expected to be worth over £20bn to the industry.

As part of the Budget, the government has committed to work with a new oil and gas regulator to review the UK's tax treatment of the North Sea in order to "ensure that it continues to incentivise economic recovery as the basin matures". Industry expert Sir Ian Wood, the recently-retired chair of Aberdeen-based energy services company The Wood Group, recommended the establishment of a new arm's length, industry-funded regulatory body to supervise the licensing regime and ensure maximum collaboration between operators as part of his government-commissioned report.

"A wholesale review of the tax regime for the UK Continental Shelf in support of the recommendations of the Wood Review has the potential to be a game changer," said energy law expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com. "Government policy has been inconsistent in respect of the North Sea and it has to be hoped that this wholesale review will provide a firm basis on which investment can be made."

"More detailed proposals are expected in the Autumn Statement 2014 following a full industry consultation. The industry must take the opportunity to make the consultation forward-looking and focussed on maximising potential. Critical to the remaining life of the UKCS is a genuine culture of collaboration among HMRC, the 'regulator' and both operators and service companies. Efficiency of operations and all commercial discussions are the responsibility of all parties," he said.