The U.K. government pledged to end the unpredictability of taxes related to the dismantling of North Sea oil platforms to encourage investment in Britain’s energy industry.
Chancellor of the Exchequer George Osborne said he would guarantee tax relief for the dismantling of installations, making it easier to sell off assets to buyers who will spend more on them. U.K. law holds sellers responsible for decommissioning if the buyer can’t pay, leading sellers to demand letters of credit for the potential costs and adding to the expense of deals.
“While much work remains to be done to work out the detail, and legislation is not expected until 2013, this is a very positive development,” said Roman Webber, head of U.K. oil and gas at accountancy firm Deloitte LLP. “This will remove a major fiscal risk for U.K. North Sea investors and release significant funds for investment.”
Companies including BP Plc (BP/) are trying to dispose of older fields in the North Sea to focus on new exploration. The government is seeking to unlock as much as 17 billion pounds ($27 billion) of investment in North Sea energy that is being held back because of uncertainty over decommissioning costs, which amount to 30 billion pounds for the rigs currently operating, a person familiar with the Treasury’s plans said last week.
“There’s no doubt there’s a big logjam of assets that companies are trying to sell,” Mark Groves Gidney, chief executive officer of explorer Trap Oil Group Plc, said earlier this week. Clarifying the taxes “will stop the logjam and free up assets for small players. That in turn may generate more tax for the country.”
Rising oil prices are increasing incentives for the government to encourage production. Brent crude prices have gained 11 percent this year to $124 a barrel.
“I also want to ensure we extract the greatest possible amount of oil and gas from our reserves in the North Sea,” Osborne said in his budget speech today in London. “We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach.”
There was 34 percent less exploration in the North Sea last year than in 2010, with levels this year similar to 2011, Deloitte said today.
Oil and natural-gas projects on the U.K. continental shelf will attract investments in the next three years, Wood Mackenzie Consultants Ltd. said Jan. 10. Energy explorers spent a record 7.5 billion pounds on U.K. projects in 2011, it said.
The government will sign contracts with North Sea producers guaranteeing tax relief for the lifetime of a project. The contracts will prevent future governments from changing the rate of tax relief, which is typically 50 percent and can reach 75 percent.
The government also plans to introduce new tax allowances, including 3 billion pounds for “large and deep fields to open up West of Shetland,” Osborne said. This is “a huge boost for investment in the North Sea.”
In last year’s budget, Osborne raised the tax rate on oil production profit to 62 percent from 50 percent to pay for a tax cut on gasoline for consumers. The move prompted Statoil ASA (STL) to put a $10 billion investment in the region on hold. Total SA (FP) said in September it would halt exploration of a gas field west of Scotland’s Shetland Islands because of the tax increase.
In July, the Treasury said it would increase a tax allowance to encourage investment in North Sea oil production as it sought to soften the impact of last year’s tax increases.
The Ring Fence Expenditure Supplement for the North Sea will rise to 10 percent from 6 percent, the Treasury said in a statement March 16. The move aims to increase investment in marginal fields that qualify for the current allowance.
“These proposed changes are the result of intense dialogue between government and industry,” Deloitte’s Webber said. “They will go some way to restoring trust which had been shaken by last year’s oil tax increase.”