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“Game changer” tax break to boost North Sea exploration

The UKCS Workforce Dynamics Review has been produced by OPITO and RGU.
Iona Energy had a number of projects in the North Sea before it went under.

Chancellor George Osborne will today announce plans for a “game changer” tax break to boost North Sea oil and gas exploration.

The allowance for ultra high pressure, high temperature fields will create billions of pounds worth of investment and thousands of jobs, the Conservative MP said.

Mr Osborne said the UK Government was responding to requests from the sector as remaining reserves become harder and more expensive to extract.

Industry body Oil and Gas UK last night welcomed the move and said the current tax regime was viewed as a “barrier to investment”.

The government said the new allowance would build on Sir Ian Wood’s recommendations for maximising economic production of oil and gas.

Sir Ian’s review estimated there are between 12-24billion barrels of oil remaining, although the Office for Budget Responsibility (OBR) recently revised down its forecasts.

The new allowance, designed to support investment in “technically challenging” projects and encourage exploration in surrounding areas, will reduce tax on a portion of a company’s profits from 62% to 30% at current rates.

Mr Osborne, speaking during a visit to Bibby Offshore Ltd in Westhill, Aberdeenshire, said: “We are announcing the consultation on a really big new tax break which the industry themselves I think have described as a ‘game changer’ for the North Sea oil and gas exploration – that’s the ultra high pressure, high temperature tax break field allowance.

“This will mean we can go ahead with some really big investments in the middle of the North Sea, particularly the Culzean field, and that will create billions of pounds of investment, thousands of jobs. It’s an example of us responding to the requests of the industry.

“They wanted us to support these new developments, and it is part of a broader strategy to make sure we have an oil and gas regime that is fit for the future, fit for the maturity of the North Sea basin, and also one that is going to secure jobs and investment here in Aberdeen and Aberdeenshire for many decades to come.”

Michael Tholen, Oil and Gas UK’s economics director, said the body welcomed the announcement on a formal consultation on how best to incentivise exploration on the UK Continental Shelf (UKCS).

He said: “Post consultation, we also hope that the allowance can be used as a blueprint for incentivising new technology investment in the UKCS.

“Experience shows ultra high pressure, high temperature fields are technically demanding and commercially difficult to develop, the current tax regime is seen by all to be a barrier to investment.

“The government will need to work closely with industry to develop a simple allowance which promotes investment in uHPHT, encourages exploration of the surrounding area to fully utilise the potential of any resulting new infrastructure; a complex solution could lead to the wrong outcome.”

Mr Tholen said the move had to be “seen in the wider context” of the Treasury’s separate consultation on the overall fiscal regime for the UKCS.

He added: “A fundamental recalibration of the fiscal regime is essential if we are to build on Sir Ian’s recommendations and send a strong signal that the UKCS is open for investment.”

The government said it “welcomes” responses from industry, and will announce the final policy design in the autumn.

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