Oil Industry Eyes UK Tax Relief For North Sea Exploration

Oil companies are hoping the U.K. government will offer up tax relief to boost North Sea exploration in its pre-budget report Wednesday, people familiar with the matter said this week.

In particular, the industry is hoping Gordon Brown, the U.K.'s Chancellor of the Exchequer, will tell parliament he intends to boost a tax credit for oil and gas exploration and extend it to well appraisal. Specifically, industry has lobbied for a current 100% write-off on new development spending to be lifted to 150%, the people said.

However, "what the smart money would be on is that the industry will get an extra 25% uplift on the exploration drilling (credit)," said an industry source, who asked not to be named.

A spokesman for the U.K. Treasury declined to comment on any possible tax proposals for the North Sea oil and gas industry.

The Treasury has reaped an average of GBP5 billion a year in taxes from North Sea oil and natural gas operations since development started in the 1960s.

Another industry wish is for tax relief to be increased incrementally, year by year, to new North Sea entrants which don't yet have a profitable production business in the basin, said Derek Leith, a tax accountant for Ernst & Young in Aberdeen, who works closely with the industry.

Such a move might ease the way for new entrants, especially smaller ones, to the North Sea, as it would help offset increases in the cost of capital as drilling progresses before profitable production starts.

Ernst & Young's Leith said the government might be more amenable to this proposal because it wouldn't lose any money in the short term, since the affected companies wouldn't have profit from North Sea production to tax anyway.

The U.K. Offshore Operators Association, an oil companies' lobbying group, declined to comment on specific initiatives the industry wants.

But spokeswoman Trisha O'Reilly said the industry, in general, is hoping for new government policies to address the decline of exploration on the U.K.'s continental shelf. "There have been a number of options, fiscal and non-fiscal, put forward at this stage," O'Reilly said. "We're just waiting to hear from the government what steps they'll take." The number of exploration wells being drilled in the U.K. North Sea has declined sharply in the past decade, from a peak of 159 in 1990 to 16 last year, O'Reilly said.

If the government moved ahead with further tax relief it would amount to the third fiscal carrot thrown to oil companies in the past year as part of an effort to boost exploitation of the North Sea basin's declining resources.

Brown has already axed a 12.5% royalty tax and nullified the Petroleum Revenue Tax on new business, in order to encourage use of older oil and gas infrastructure in the North Sea.

It would also provide an additional salve to the wound inflicted a year and a half ago, when the government unexpectedly hiked corporate income tax on profits generated by oil companies in the North Sea to 40% from 30%.

Such tweaks to the tax regime in the North Sea complement a number of non-fiscal measures the government has taken to maintain exploitation of the North Sea. Such measures include: a "use it or lose it" program to make companies give up undeveloped exploration acreage to companies that want to use it; a new "Promote" license, with easier terms to entice new, often smaller companies into the basin; and agreements brokered with companies to make basin and infrastructure data more widely available.

The final budget will be released in late March or early April of next year.