UK Brown: North Sea Tax Exemption to Boost Oil, Gas Exploration

Dow Jones Newswires

LONDON, Dec 07, 2006 (Dow Jones Newswires)

U.K. Chancellor of the Exchequer Gordon Brown Wednesday said he will exempt companies that are re-exploring old gas and oil fields from a special revenue tax in order foster more production from the North Sea.

The U.K. government will exempt all North Sea oil or gas fields from the Petroleum Revenue Tax where decommissioning has taken place and the field is subsequently being recommissioned, Brown said in his pre-budget report. The announcement was part of his attempt to foster further offshore oil and gas exploration as U.K. North Sea supplies continue to dwindle.

Brown said the exemption will take effect July 1, 2007, and will cover any field that has been redeveloped or is expected to be redeveloped in the future.

"The measure should encourage investors to consider the viability of reopening abandoned fields to recover untapped reserves and is to be very much welcomed," Malcolm Webb, chief executive of the U.K. Offshore Operators Association, said in a statement. "It is a clear demonstration of how the removal of a tax could generate new production - and further tax revenues," he added.

The Petroleum Revenue Tax was abolished in 1993 but still applies to North Sea oil and gas fields that began operating before then.

The PRT, together with the 50% special corporation tax rate on North Sea output, brings the marginal tax rate paid by those fields to 75%.

Julian Small, energy tax partner at accountancy and consultancy firm Deloitte & Touche Ltd said, "This reform will remove this economic distortion and encourage the redevelopment of decommissioned fields, and is welcome news for the North Sea upstream industry."

The Treasury cut its forecast of North Sea tax receipts because of higher capital investment in the North Sea, increased operating expenditure, lower than anticipated North Sea oil and gas production and a stronger dollar-sterling exchange rate.

The North Sea tax receipt forecast - which includes the North Sea corporation tax, the Petroleum Revenue Tax, and royalties - was cut by GBP3 billion for the fiscal year 2007-08 to GBP10.7 billion.

As a result, 2007-08 North Sea tax revenues, which are expected to account for about 2% of the government's total revenues, will only rise by 11% above last year's North Sea tax receipt and will be about 3% higher than this year's estimated North Sea tax receipt.

The Treasury estimates that North Sea oil and gas output will decline at an average rate of about 3% a year between 2006 and 2011, reflecting dwindling supplies from existing offshore fields, which are partly offset in 2007 and 2008 by additional output from new fields coming on stream, such as the Buzzard field.

The North Sea oil and gas sector currently accounts for around 1.5% of the U.K.'s gross domestic product and accounted for 9.5% of the country's total export value last year.

Output from the North Sea oil and gas sector fell by almost 8% in the year to the third quarter of 2006, and has fallen 38% since peaking in 2000, the Treasury reported.

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