UK Oil Industry Welcomes Budget Speech

UK Chancellor Confirms Decommissioning Tax Relief

Industry body Oil & Gas UK has welcomed the Chancellor of the Exchequer's announcements of measures to provide certainty to the oil sector in the UK and stimulate investment in the country's oil and gas reserves, the organization said Wednesday afternoon.

"Oil & Gas UK is greatly encouraged by the package of tax measures announced by the Chancellor which together will result in tens of billions of pounds of additional investment to develop the UK's economically important oil and gas reserves, all at no net cost to the Exchequer. The changes announced are the result of over a year of constructive, collaborative work and reflect the Treasury's proper and considered approach to the industry's proposals," said Oil & Gas UK Chief Executive Malcolm Webb.

UK Chancellor George Osborne confirmed earlier Wednesday that the UK's oil industry would get a guaranteed tax relief on the costs of retiring old rigs and platforms.

Osborne said that he wanted to ensure that the UK extracts the "greatest possible amount of oil and gas" from its reserves in the North Sea in future decades.

"We are today introducing a major package of tax changes to achieve this," he said in his Budget 2012 speech. "We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach." 

Over the weekend, sources at HM Treasury – which manages the UK's finances – indicated that the Chancellor would announce a formal guarantee so that tax relief for retirement costs would remain in place for decades. There had been fears that there could be changes to current rules that see the government covering around half the costs of dismantling oil fields by making them tax deductible.
Osborne added in his speech that the UK government is also introducing new allowances. This will include a $4.75 billion (GBP 3 billion) new field allowance for large and deep fields designed to open up West of Shetland, the last area of the basin left to be developed.
Accounting firm Ernst & Young welcomed the oil industry's measures announced in Wednesday's speech.
"Today's announcement promises to encourage significant investment in the North Sea and was badly needed after last year's shock increase in the oil and gas tax rate," said Derek Leith, head of oil and gas taxation at Ernst & Young in Aberdeen.
"Confirmation that the government intends to enter into contractual agreements on tax relief for decommissioning cost improves the fiscal stability of the UK Continental Shelf, while the targeted incentives for particular types of fields will go some way in increasing the attractiveness of areas currently starved of investment."
Leith added: "The Budget demonstrates government acceptance that establishing a stable tax environment in the basin will prolong the life of existing infrastructure, deliver millions of more barrels of oil equivalent and boost the Treasury's coffers via increased tax take."
Rival accountancy firm Deloitte said that the tax relief guarantee will remove a major fiscal risk for UK North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees.
"This will also free up capital available for investment and development of opportunities in the North Sea. This activity boost should also increase the tax take for government. Deloitte Petroleum Services Group estimates that the UK North Sea decommissioning costs are estimated to be almost $50B over next 30 years," said Derek Henderson, head of tax at Deloitte.
Henderson also noted the government's proposal for various targeted incentives to stimulate investment in technically-challenging areas such as West of Shetland, while also leaving open the possibility of the introduction of further reliefs targeting specific opportunities such as brown fields and 'high pressure high temperature' fields.
"Work done by the Deloitte Petroleum Services group showed levels of exploration and drilling activity on the [UK Continental Shelf] during 2011 were 34 percent lower than during 2010, and the lowest since 2003. To date, the levels in 2012 have been comparable to same period in 2011. The measures announced today show willingness of government to work with industry to create an environment in which the maximum economic recovery of hydrocarbons from the UK North Sea can be achieved in the years to come," said Henderson.


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