UK Chancellor Announces New HP/HT Field Allowance in 2014 Budget

UK Chancellor of the Exchequer George Osborne announced a new allowance to support investment in ultra-high pressure, high-temperature (HP/HT) oil and gas projects in his annual Budget speech to the House of Commons Wednesday.

Osborne also confirmed his announcements made in autumn 2013 that oil and gas tax rates will remain set and ring-fenced from 2015 onwards and the introduction of an allowance to support onshore oil and gas exploration and development along with a package of measures designed to support oil and gas exploration on the UK Continental Shelf.

The Ultra-High Pressure, High-Temperature Cluster Allowance will exempt a portion of a company's profits from the Supplementary Charge that is taxed on oil and gas lifted from the UK Continental Shelf. The amount of profit exempted from the charge will equal at least 62.5 percent of any qualifying capital expenditure that a company incurs on such profits.

Derek Leith, head of oil and gas taxation at Ernst & Young's office in Aberdeen, noted that the announcement of a new HP/HT allowance is the third attempt by industry and HM Treasury to introduce an incentive to support the development of large HP/HT fields.

"The new allowance is different from its predecessors in that it is set as a percentage of capital spend including exploration and appraisal as well as development costs. As such, it is tailored more to the actual economics of the field," Leith said.

"This is a significant development in the various fiscal incentives introduced to stimulate North Sea investment following increases in Supplementary Charge in 2006 and 2011. For the first time in an offshore context we have an allowance which is given directly in proportion to capital spend. This can be seen as the way forward for such allowances. 

"It should enable the development of at least two large gas fields with related benefits to the supply chain and the UK economy as a whole."