New tax breaks for older oil and gas fields welcomed by expert

Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, said that measures announced by the Chancellor of the Exchequer last week were the "latest step being taken by Government to repair the damage done" by tax increases on the oil and gas industry in 2011.

However, he warned that oil and gas producers would need "further reassurance" from the Government before its credibility with the industry would be "fully restored".

The new tax measure, announced by George Osborne on Friday, is intended to encourage billions of pounds worth of potential investment in older oil and gas fields in the North Sea, the Government said. The new Brown Field Allowance will exempt a portion of the income generated from certain mature fields from the 32% Supplementary Charge (SC).

Osborne said that the announcement was "more good news for the North Sea", which he described as a "huge national asset". It follows the introduction or extension of allowances for small fields, large shallow-water gas fields and fields in the West of Scotland earlier this year, as well as a Government commitment to sign contracts with the industry to guarantee long-term tax relief when used assets are decommissioned.

"Today's tax allowance is more good news for the North Sea, good news for jobs and good news for the broader economy," Osborne said. "It will give companies the incentive to get the most out of older fields, creating jobs and delivering more revenue for taxpayers."

According to the Treasury's announcement, the long-term revenues generated by the new initiative are expected to "significantly outweigh" the initial cost of introducing the allowance, which it said would cost around £100 million a year. Government watchdog the Office for Budget Responsibility (OBR) will publish "full scorecard costings" of the measure as part of its autumn forecast, it said.

The new allowance will exempt up to £250m of income in qualifying brown field projects, or £500m for projects in fields paying Petroleum Revenue Tax, from the SC rate; resulting in tax relief of up to £80m of £160m respectively. The relief will be granted to individual projects on a case by case basis, depending on the size and unit costs of the project.

The Department for Energy and Climate Change (DECC) will issue revised consents for development to qualifying projects on application from 7 September 2012. Incremental projects increasing expected production from offshore oil or gas fields, with verified expected capital costs per tonne in excess of £60 on their incremental reserves, will be entitled to apply for the relief. The maximum level of allowance will be £50/tonne, available to those projects with verified expected capital costs of £80/tonne or above.

Industry body Oil and Gas UK welcomed the announcement, which it described as a "strong signal" of the Government's stated commitment to make the most of the UK's existing oil and gas resources. Brown field sites, according to its director Mike Tholen, typically have high running costs and can be subject to up to 81% tax on production.

"This initiative will have an immediate impact in that it will help to promote investment and sustain production from many mature fields, enabling more oil and gas to be recovered from them and postponing decommissioning by a number of years," Tholen said. "The measure builds on recent constructive interventions by the Treasury and we believe in the near term it should rapidly lead to a number of new investments amounting to £2 billion, create many thousands of high skilled jobs, add tax revenues of over £1.5 billion and increase oil and gas recovery by 150 million barrels of oil equivalent, and have further long term impact."