Oil & Gas UK 'Greatly Encouraged' by Tax Relief

Oil & Gas UK 'Greatly Encouraged' by Tax Relief

UK energy industry association Oil & Gas UK is "greatly encouraged" by UK Chancellor of the Exchequer George Osbourne's announcement Wednesday for tax relief to support investment in new large shallow-water gas fields in the UK North Sea, the group said in a statement on Wednesday.

UK Chancellor of the Exchequer George Osbourne unveiled plans to establish a $773.7 million (GBP 500 million) field allowance for large shallow-water gas fields to secure future investment in North Sea gas while creating jobs and boosting energy security for the UK.

"Gas is the single biggest source of energy in the UK," said Osbourne. "Today the government is signaling its long-term commitment to the role it can play in delivering a stable, secure and lower-carbon energy mix."

Oil & Gas UK welcomed the tax relief for new shallow gas fields, which have particularly high capital costs and are subject to a 62 percent tax on production, the group said.

"It makes absolute economic sense to promote oil and gas production from the resources we in the UK are fortunate enough to possess," Oil & Gas UK said. "We believe the measure should trigger the development of specific gas projects involving expenditure of £2.4 billion [USD 3.7 billion], the creation of 4,000 British jobs and £600 million [USD 928.5 million] of additional tax revenues for the public purse."

The chancellor had said at Budget 2011 that he would consider introducing a new category of field allowance for marginal gas fields to stimulate investment in North Sea oil and gas production.

The allowance would protect $773.7 million (GBP 500 million) of income from qualifying fields from the 32 percent Supplementary Charge (SC) tax rate. These fields will still pay 30 percent Ring Fence Corporation Tax on all income from the field, in addition to SC on all income not protected by the field allowance.

The allowance would apply to new large shallow-water gas fields that have been authorized for development on or after July 25. The allowance would also apply to fields:

  • With a share of gas reserves greater than 95 percent based on the central estimates of oil and gas reserves at the time of development authorization
  • Lie in a water depth of less than 98 feet (30 meters)

The maximum allowance will be available to fields with a central large estimate of between 353 billion cubic feet (Bcf) and 706 Bcf (10 billion cubic meters (Bcm) and 20 Bcm), tapering to no allowance at 882.8 Bcf (25 Bcm).

The measure is expected to cost approximately $30.9 million (GBP 20 million) per year; final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out in the Exchequer's Autumn statement 2012.

Two or more fields qualifying on the same day will be considered together in order to meet the gas reserves criterion, with the total allowance to be allocated between them in proportion to their respective central estimates of gas reserves.

Budget 2012 gave the chancellor power to introduce a brown field allowance to promote investment in existing fields. According to Oil & Gas UK, this power would build on recent constructive interventions, boosting investment by a further $5.4 billion (GBP 3.5 billion), creating tens of thousands of highly skilled job, adding tax revenues of over $3.1 billion (GBP 2 billion) and boosting oil and gas recovery by more than 200 million barrels of oil equivalent (boe).

"The government will continue to work with the oil and gas industry to consider how a potential brown field allowance could be structured to unlock investment, while protecting Exchequer revenues," said the chancellor in a statement. A contractual approach also is being considered to provide greater certainty on decommissioning tax relief.

While it was encouraged by the progress made, Oil & Gas UK said "time is now of the essence" in furthering oil and gas development. "For some fields near the end of their planned life, an early decision on support for further investment in urgently required if the UK is to reap the full benefit in terms of jobs, tax revenues and energy security."

Oil & Gas UK in its Economic Report 2012 estimated that between 15 and 24 billion boe of proven, probable and possible reserves from existing fields and new developments have yet to be recovered.

The group cited estimates from the Department of Energy and Climate Change (DECC), which estimates approximately 20 million BOE could still be recovered. DECC's estimate reflects a wider ranger of uncertainty, with forecasts from 11 to 35 billion BOE.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com


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