UK industry gives cautious thumbs-up to budget stimulus

April 23, 2009
The UK government has introduced new measures in its annual budget in an attempt to stimulate E&P activity.

Offshore staff

LONDON -- The UK government has introduced new measures in its annual budget in an attempt to stimulate E&P activity.

Among these are:
- A field allowance, to be offset against Supplementary Corporation Tax (20%). This will apply to development of marginal or technically problematic fields (i.e. high pressure, high temperature gas and heavy oil)
- Fiscal barriers will be lifted for new projects involving re-use of existing UK North Sea assets and infrastructure, including subsurface gas storage and carbon capture/storage. Any income derived from these projects will be kept outside the scope of Petroleum Revenue Tax (PRT). And operators incurring decommissioning costs for change-of-use assets will also be able to claim relief against Corporation Tax and PRT
- Capital allowances will be offered for "cushion gas" in gas storage projects
- Effective April 22, gains arising from North Sea asset disposals will be exempt from charges where the proceeds are re-invested in the UK continental shelf, or in instances where licenses of similar value are swapped. The intention is to facilitate transfer of oil licenses and to ensure the assets therein are developed
- The government also announced plans to reduce the administrative burden of PRT and to rescind obsolete PRT legislation – at the same time as introducing new anti-tax avoidance measures to prevent companies benefiting from tax relief on decommissioning costs where no actual decommissioning has taken place.

Andrew Ogram, Oil & Gas Partner with Deloitte LLP in Aberdeen, said the measures were largely anticipated, but would still be welcomed by the industry. "Having said this, some will be disappointed that the announcement did not go further given the current oil price environment and declining exploration activity – for example to introduce additional incentives for companies to explore in the UK."

Malcolm Webb, chief executive of Oil & Gas UK, acknowledged that the Budget was "a step in the right direction", showing that the government had recognized the need to reduce the tax burden on UKCS production to enhance recovery of remaining reserves.

"However, we now need to direct our attention to sustaining and promoting investment in and around many of our older fields to prolong their lives, to stimulating exploration activity, and to opening up the frontier areas west of Shetland…"

"We must not forget," he continued, "that a number of small companies involved in exploration, the `lifeblood of the industry', are suffering severely from the lack of access to equity markets and we regret that the Chancellor of the Exchequer did not act on our recommendations to improve funding of this crucial activity."

The Oil and Gas Independents Association (OGIA) reacted favorably. Chairman Steve Jenkins said the measures should assist both small and large independent companies to maintain their activities in a high-cost region.

"OGIA believes this is an important first step in making the UKCS fiscal regime competitive on an international basis, but further steps will be required in the near future, and we will be looking at the small print of the announcement over the next few days. In addition, progress is required to assist North Sea-related activities in other areas such as infrastructure access and decommissioning."

Subsea UK's chief executive Alistair Birnie believed the proposals would incentivize the movement of assets to the smaller independents operating on the UKCS, "who must be given every support and fiscal encouragement to eke out the remaining hydrocarbon reserves". But he also felt more radical action could have been taken to stimulate North Sea activity.

Jim Hannon, MD of consultants Hannon Westwood, said the Field Allowance could help sustain drilling on a current stockpile of over 300 UKCS discoveries, and would also benefit indirectly exploration drilling by making the sector more attractive in a competitive E&P world.

The government also pledged £260 million ($376 million) towards increasing training and subsidies in UK business sectors with a strong future demand. David Doig, chief executive of the Oil & Gas Academy (OPITO), said he would like to see a significant proportion of these funds directed at key disciplines such as science, mathematics, and engineering, which he described as critical to the industry's growth.

"Funding however needs to be aligned to learning provision which is relevant to business in that it improves productivity and efficiency, rather than falling into the trap of putting people on training courses which are not wholly relevant."