New Tax Break for North Sea Oil Firms on the Horizon

The United Kingdom is devising a new plan for tax breaks in an effort to increase investment by North Sea oil firms and lessen the impact of a tax hike imposed in 2002, according to industry and government officials.

Progress towards extra tax rebates on four billion pounds ($6.5 billion) a year of capital investment could be announced as soon as November, when Chancellor of the Exchequer Gordon Brown is due to preview tax-and-spend plans, which will be fleshed out in April.

At the center of discussions between the Treasury and the oil and gas industry is a plan to raise tax allowances on capital investment to 125 percent, or possibly 150 percent, from the current 100 percent level.

Roy Franklin, chief executive of Paladin Resources, said the moves would help repair relations between the government and the oil industry, which were damaged in 2002 when Brown slapped a new 10 percent tax on oil and gas profits on top of 30 percent corporation tax and other special taxes already paid by the industry.

"This time around, the Treasury and the industry are tackling the problem together," said Franklin.

"There could be some indications about these discussions in the November statement, though there is no certainty of that at the moment," added a government source.

Large oil and gas firms criticized the 2002 tax hike, saying it would accelerate the decline of the North Sea, already a mature province whose older fields are being abandoned by companies such as BP and Shell.

To try to offset the pain for the industry and keep investment going, 100 percent relief on new development investment was introduced at the same time as the tax. Earlier this year, the government also removed the 12.5 percent royalty paid on oil revenue from older fields.

Total 2002 capital investment eligible for the 100 percent rebate in the British North Sea was 3.8 billion pounds, according to the United Kingdom Offshore Operators Association. The government's total tax take from the North Sea in the same year was 4.9 billion pounds.
RA Treasury spokeswoman confirmed that talks were taking place but said details had not been agreed and would not give the timing of any announcement. "At the time of the last budget we said we would consult informally with the industry on possible targeted measures to increase the level of exploration in the North Sea," she said. "Officials have been speaking to a number of industry representatives... but any tax decisions are solely an issue for the Chancellor."