Chancellor moves to boost North Sea investment

City A.M. Reporter
Chancellor George Osborne unveiled in his budget plans to boost investment in the North Sea, giving oil firms certainty on the level of tax relief they will receive when they dismantle pipelines and platforms and introducing new tax breaks for some projects.

Chancellor George Osborne said in his annual budget on Wednesday Britain will agree on a contractual basis the level of tax relief companies will be entitled to when they shut fields.

Osborne also said he was also introducing new tax breaks for harder-to-develop fields, such as those in deeper water, including a new £3bn tax break to open up development of oil fields in the frontier region to the west of the Shetland Islands.

The moves are designed to unlock billions of pounds of investment in the North Sea, where production has been falling since 1999, to help ensure oil keeps pumping from the less readily available resources which are still left.

"I want to ensure we extract the greatest possible amount of oil and gas from our reserves in the North Sea," Osborne said.

Companies currently receive decommissioning tax relief of between 50 and 75 per cent, with the level of tax relief rising with the age of the oil field, but the UK government prompted anxiety in the industry with its 2011 budget when it said it planned to limit tax breaks on field abandonment costs.

"Ending uncertainty on decommissioning tax relief is a positive for the owners of mature fields with significant infrastructure and could simplify the sale of these assets from larger operators to small and mid-cap exploration and production companies," Royal Bank of Canada analyst James Hosie said.

In recent years, larger oil companies such as BP have been scaling back in the North Sea, selling fields to smaller companies who tap the remaining reserves.

Enquest and Premier Oil, two mid-sized players with a North Sea focus, could benefit from the clarity over decommissioning, said Numis analyst Sanjeev Bahl, as the certainty on that front could free them for acquisitions and new developments.

Meanwhile in another announcement on the energy sector in the Budget, Osborne said the government will consider replacing a scheme to cut corporate energy use with an alternative environmental tax if it cannot reduce the scheme's administrative costs.