UK says tax relief and reforms ‘will boost investment in oil and gas industry’

Out-Law News | 05 Dec 2014 | 11:56 am | 2 min. read

The UK government has announced a package of reforms and additional support for the country’s oil and gas industry.

Reforms include the introduction of a “basin-wide investment allowance” designed to reduce the effective tax rate for companies investing in the future of the UK Continental Shelf.

The government has also pledged to boost offshore exploration with financial support for seismic surveys to be conducted in under-explored areas of the North Sea.

Ministers told a meeting of industry representatives on 4 December that the government will start talks with the country’s new Oil and Gas Authority “on ways to remove fiscal barriers to extend the life of critical infrastructure, in addition to providing access to relief on the decommissioning of assets”.

Reforms include an “immediate cut” in the rate of the supplementary charge on oil firms' profits from 32% to 30%, plus a new “cluster allowance for high pressure, high temperature projects”.

The government also promised to “consider options for decommissioning and infrastructure” and provide an extra £6 million of funding for the Oil and Gas Authority.

The government’s announcement followed a consultation period with the industry on the oil and gas fiscal regime that took place earlier this year.

Exchequer secretary to the Treasury Priti Patel said the government was “demonstrating its long term commitment to supporting the North Sea oil and gas industry with a package of measures expected to drive around £7 billion of additional investment”.

Patel said: “These measures will reduce the tax burden on the industry, driving investment in the North Sea that will provide economic benefits to the UK for many years to come.”

"The Treasury’s plan to reform the oil and gas fiscal regime is an interesting and encouraging document, which recognises the importance of the industry, while at the same time acknowledging the need to be more competitive in attracting and promoting capital investment in the UK continental shelf (UKCS)," said Bob Ruddiman, an energy expert at Pinsent Masons, the law firm behind Out-Law.com.

"The plan's executive summary stresses the need for collaboration, and the proposed reforms demonstrate the government’s commitment to a tripartite approach to reshaping how we approach North Sea exploration, which maximises financial return for operators, stakeholders and UK plc," he said.

The government said last year that it would offer tax relief connected to the costs of decommissioning oil and gas exploration infrastructure. Ruddiman said that there may be further movement on that issue.

"A really important element is that the Treasury no longer appears to be saying that that it has done everything it can do on decommissioning, signalling it will improve access to decommissioning tax relief and will look at reforming the fiscal treatment for infrastructure," he said.

New oil and gas industry tax breaks were introduced as part of this year's Autumn Statement announced by chancellor of the exchequer George Osborne on 3 December.

Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, has said that the measures announced were a "good start", but may not be enough to address the problems of diminishing production and increasingly difficult to access reserves without more widespread reform.

At the 2014 Budget, unveiled earlier this year, the government announced a review of oil and gas taxation as recommended by industry expert Sir Ian Wood in his report on how best to maximise recovery.

Under current projections, the UK is expected to recover the equivalent of a further nine billion barrels of oil (boe) from the UKCS, but Wood has said that this could be increased to as much as 20bn boe if his recommendations are adopted in full.

In 2013, the UK oil and gas sector attracted a record £14bn of capital expenditure, while 36 new offshore projects were approved. There are now over 50 companies at work in the North Sea following the entry to the market of 21 new licence holders following a record-breaking 27th licensing round last year.