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In an effort to boost activity offshore U.K. and maximize ultimate recovery, the U.K. government offered tax breaks for large, deepwater fields and tax relief for decommissioning platforms.
The U.K. government has proposed the introduction of new tax breaks including a £3 billion ($4.7 billion) new-field allowance for large and deepwater fields as it bids to open up the frontier waters west of Shetland for new development.
U.K. Chancellor George Osborne gave details of the likely investment boost for the North Sea region during his budget speech on March 21 and described the west of Shetland region as being “the last area of the basin left to be developed.”
Shares in oil companies with operations west of Shetland immediately rose following Osborne’s speech in Parliament.
Set to benefit most from any eventual reduction in tax will be larger companies such as BP and Total, which have substantial new field developments underway in the region such as the deepwater Quad 204 project operated by BP and Total’s Laggan development.
The government also promised to end uncertainty over who pays for the dismantling of old North Sea platforms.
Osborne said he was determined that Britain should extract the greatest amount of oil and gas reserves possible at a time of soaring global crude prices.
“We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach,” he said.
“We are also introducing new allowances including a £3 billion new field allowance for large and deepwater fields to open up west of Shetland, the last area of the basin left to be developed,” Osborne explained.
The government’s proposals are being welcomed by the industry, which was badly shocked by last year’s windfall tax imposed on it without warning.
Derek Henderson, head of tax at Deloitte, commented, “Following 12 months of intense discussions on the constraint uncertainty around decommissioning relief has on activity and investment, the chancellor announced today enabling legislation that will be put in place to allow U.K. North Sea companies to enter into contracts with government, which should guarantee future tax relief on decommissioning costs.
“This will remove a major fiscal risk for U.K. North Sea investors and may release significant funds for investment by allowing companies to move to post-tax decommissioning guarantees. This will also free up capital available for investment and development of opportunities in the North Sea. This activity boost should also increase the tax take for government.
“Deloitte Petroleum Services Group estimates that the U.K. North Sea decommissioning costs are estimated to be almost $50 billion over next 30 years,” he explained.
“The government has also proposed various targeted incentives, namely the extension of the field allowances regime to stimulate investment in technically challenging areas such as West of Shetland where the majority of future prospects are located as well as extending relief for smaller fields.
“The government has also left open the possibility of the introduction of further reliefs targeting specific opportunities such as brownfields and high-pressure, high-temperature fields. This is to be the subject of further consultation between industry and government,” he continued.
“These proposed changes are the result of detailed dialogue between government and industry and go some way to restoring trust which had been shaken by last year’s SCT increase,” he emphasized.
He added that studies done by the Deloitte Petroleum Services Group showed levels of exploration and drilling activity on the UKCS during 2011 were 34% lower than in 2010, and the lowest since 2003. To date, the levels in 2012 have been comparable to the same period in 2011.
“The measures announced today show willingness of government to work with industry to create an environment in which the maximum economic recovery of hydrocarbons from the U.K. North Sea can be achieved in the years to come,” he noted.
“Deloitte anticipates the proposed measures will incentivize and encourage higher exploration and appraisal activity levels, brownfield and new field developments and overall investment in the U.K. North Sea. It may also trigger further confidence in the financial markets to support U.K. oil and gas investment plans. It is likely that asset transfers and deal flow will increase especially for smaller players looking to tap into mature producing assets,” Henderson said.
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