UK to raise tax relief for North Sea oil companies

Dec 15, 2003 01:00 AM

The UK government moved to boost oil and natural gas exploration in the flagging North Sea, saying it will raise tax relief for companies searching for offshore hydrocarbons.
"To encourage new companies to enter the North Sea, I will enhance the tax relief for their costs of exploration," said Gordon Brown, the chancellor of the exchequer, in an address to parliament on budget proposals for the coming fiscal year.

The government's move will likely be welcomed by the oil industry, which has lobbied the government to raise tax relief on exploration, the lifeblood of companies. The number of exploration wells drilled in the UK North Sea has declined sharply in the past decade, from a peak of 159 in 1990 to 16 last year, according to the UK Offshore Operators Association, an oil companies' lobby group.
Oil companies have specifically asked the government to increase write-offs on exploration to 150 % of costs from its current 100 %. It also is looking for tax relief for new entrants to the North Sea to help in their exploration activities. The industry has proposed that that relief be incrementally raised each year, until those companies begin production activities.

It's unclear from Brown's announcement whether the proposed tax changes address these industry demands. The UK Treasury has reaped an average of £ 5 bn a year in taxes from North Sea oil and natural gas operations since development started in the 1960s. But UK oil production peaked in the late 1990s and gas production is falling rapidly, which is expected to leave the country -- the world's third largest consumer of gas - in a net importing position for late 2005-early 2006.
The Treasury said that it "will introduce a new exploration expenditure supplement to reduce barriers to entry for new North Sea companies that do not receive the full benefit of current 100 % exploration and appraisal capital allowances."

A spokesman at the Department of Trade & Industry, which has jurisdiction over energy activities, said the aim of the supplement is to help beef up allowances for new companies to the North Sea which carry out exploration and appraisal activities. This is ahead of them being liable to pay taxes on profits.
Nicola Savage, a spokeswoman for the DTI, said Brown had decided against an across-the-board boost of the 100 % exploration capital allowance to 125 % or more, which oil companies had lobbied for.
"The overall benefits (of such a boost) are not enough to justify the cost, particularly given the tight fiscal climate," Savage said.

Derek Leith, head of oil and gas taxation for Ernst & Young in Aberdeen, said "there is a palpable sense of disappointment in the industry" that the allowance wasn't boosted across the board. As for the enhancement of the allowance for new companies, Leith said: "From my perspective, I wouldn't want any press coverage that said this measure is going to make much of a difference. "This will apply to a relatively small number of companies and it's not even clear how big its going to be."
Full details on the size of the enhanced tax relief for new entrants to the North Sea and when it will be effective will be announced in the government's budget, expected in late March or early April next year. This move to enhance exploration tax relief amounts 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 nulled the Petroleum Revenue Tax on new business, in order to encourage use of older oil and gas infrastructure in the North Sea. These followed the government's unexpected move a year and a half ago to hike corporate income tax on profits generated by oil companies in the North Sea to 40 % from 30 %, which infuriated the industry. 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.

Source: Dow Jones
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