North Sea oilfields are set to benefit from a new clutch of tax breaks after Philip Hammond confirmed his intention to make changes to UK oil and gas tax legislation.
The Chancellor hopes that the move will help spur up to £40bn in investment in the declining industry.
The changes – lobbied for by the Oil & Gas UK industry group – will allow producers selling their oilfields in the region to hand over existing tax breaks to the buyer.
Reduces costs of decommissioning North Sea fields
This will allow the buyer to benefit from larger tax relief when fields run dry and require dismantling – known in the industry as decommissioning.
Decommissioning remains a sticking point in many North Sea negotiations because the original operator is ultimately responsible dismantling the fields with buyers unwilling to take on the costs without the tax breaks.
The move could be particularly significant for London’s listed mid-cap and junior offshore oil companies that aim to squeeze as much oil as possible from the mature North Sea basin.
“Decommissioning is a significant factor when deciding whether to invest in the North Sea and the ability to transfer tax history for oil and gas fields is a welcome first step to help to address this concern,” said Andrew Benitz, chief executive of Jersey Oil & Gas – an AIM-quoted group with plans to acquire producing mature North Sea assets.
The exact details of the proposed changes will be worked through in 2018, Hammond said.
“There is plenty of life left in the North Sea yet,” Benitz proclaimed.
Independent Oil & Gas PLC (LON:IOG) boss Mark Routh echoed those comments, adding: “We welcome this new innovative tax policy which is precisely what a mature oil and gas province such as the North Sea needs to stimulate deals, increase activity and therefore achieve higher production and revenue from the sector.”
Government wants to maximise value of UK’s oil assets
“Today’s announcement by the Chancellor represents an unprecedented change to UK oil and gas tax law and is a clear demonstration that the government wishes to maximise the value of the UK’s remaining hydrocarbon reserves,” said EY’s head of oil and gas tax Derek Leith.
“A key plank of government policy to maximise economic recovery and to reduce the cost of decommissioning is to get the larger mature assets in the UK Continental Shelf into the hands of those companies that will focus on late life investment, extend the producing life of the assets and ultimately decommission these large fields more cheaply.
“New investment in the UKCS is the lifeblood to preserving an industry which has made a huge contribution to the UK’s economy over many decades, and supporting a supply chain focused on innovation and internationalisation.”