Chancellor George Osborne has this morning unveiled a new oil and gas tax break it is hoped will boost spending in the North Sea and unlock £1.5billion of extra revenues to the UK treasury.
The new “brown field” tax allowance will be aimed at older fields to increase production from the mature North Sea basin – see details below.
It is the latest in a series of reliefs introduced for the industry, following a surprise £10billion tax grab made last year.
This saw a supplementary charge on North Sea producers rise from 20% to 32%.
A proposal to introduce a brown field allowance was announced in this year’s Budget, unveiled in March. However, until now details had yet to be agreed.
The new allowance will shield up to £500million of income from the supplementary charge when firms are boosting production from established oil or gas fields – potentially cutting their tax bill by £160million.
The move is expected to cost the Exchequer £100million per year initially – but officials say long-term tax revenues will be higher.
Mr Osborne said: “Today’s tax allowance is more good news for the North Sea, good news for jobs and good news for the broader economy.
The treasury said the brown field allowance will shield up to £250million of income in qualifying brown field projects, or £500million in fields paying Petroleum Revenue tax, from the 32% supplementary charge rate – providing tax relief of up to £80-£160million respectively.
A qualifying project will be an incremental project increasing expected production from an offshore oil or gas field as described in a revised consent for development authorised by the Department of Energy and Climate Change on or after today and has capital costs per tonne of incremental reserves in excess of £60. The maximum level of allowance will be £50/tonne and will be available to projects with verified expected capital costs of £80/tonne or above.
“It will give companies the incentive to get the most out of older fields, creating jobs and delivering more revenue for taxpayers.
“This government has signalled its absolute determination to get more investment in the North Sea, a huge national asset.”
Derek Henderson, senior partner at Deloitte in Aberdeen, said:
“We expect the brownfield allowance to stimulate development drilling as well as deal activity, as companies will be re-evaluating mature assets.
“Enabling legislation for the introduction of this allowance was already included in the Finance Act 2012, announced earlier this year. The allowance will work by reducing the profits subject to the 32% supplementary charge.
“The level of the allowances available will depend on the expected project costs and incremental reserves, but will be worth up to a maximum of £160million net for projects subject to Petroleum Revenue Tax (PRT) and £80million for those that are not subject to the tax.”
Trade body Oil & Gas UK (OGUK) welcomed the Chancellor’s announcement.
Economics and commercial director Mike Tholen said: “This is a strong signal of the government’s commitment to make the most of the UK’s oil and gas resources to the benefit of our energy security, the public purse and jobs.
“OGUK is encouraged by the support announced for oil and gas brown fields in the UK which typically have high running costs and are subject to up to 81% tax on production.
“This initiative will have an immediate impact in that it will help to promote investment and sustain production from many mature fields, enabling more oil and gas to be recovered from them and postponing decommissioning by a number of years.
“The measure builds on recent constructive interventions by the treasury and we believe in the near term it should rapidly lead to a number of new investments amounting to £2billion, create many thousands of high skilled jobs, add tax revenues of over £1.5billion and increase oil and gas recovery by 150million barrels of oil equivalent, and have a further long term impact.
“We recognise this is an on-going dialogue and we will continue to engage constructively with the treasury on appropriate means to promote investment.”