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Tax relief set to boost investment in North Sea drilling


Chancellor George Osborne unveiled the details of his latest budget last week, with an increased tax allowance for drillers in the North Sea among the highlights for the UK oil and gas industry to take note of.

With legislative changes set to be introduced in the coming weeks, the announcement promises broadened tax allowances for the offshore industry, aiming to promote much needed investment in ultra-high pressure, high temperature (HPHT) fields on the UK continental shelf (UKCS).

As offshore oil and gas are currently experiencing some of the lowest output levels since 1977, and with Deloitte having estimated a “28% drop in oil and gas exploration and appraisal drilling in the North Sea” last year, this news comes as welcome respite for the sector.

Indeed, it is hoped that allowing a portion of a company’s profits to be exempt from the supplementary charge will stimulate improved investment in the HPHT sector.

Profit equivalent to at least 62.5% of the qualifying capital expenditure that a company incurs on these projects will be exempt from taxation.

Wood Report recommendations

Coming in the wake of the Wood Report, which highlights key improvements necessary to maximise oil and gas resources, Chancellor Osborne was keen to stress that industry veteran Sir Ian Wood’s warning of a continued decline in production would not go unheeded.

Mr. Osborne explained that the government “will take forward all recommendations of the Wood report,” promising that his party will “review the whole tax regime to make sure it is fit for the purpose of extracting every drop of oil we can”.

Similarly, onshore oil and gas exploration will receive a heightened tax allowance, following the budget announcement, with the amount of profit exempt equalling 75% of the qualifying capital expenditure incurred on onshore oil and gas projects since December 5th 2013.

With a generous investment of over £7 billion in tax incentives for British oil and gas in 2013 alone, this move certainly highlights Mr. Osborne’s emphasis on improved British exports.

Better together

Recent figures from the Office of Budget Responsibility have downgraded its forecast for North Sea oil and gas tax receipts by a further £3 billion in 2014/15.

With the referendum on Scottish independence looming, Mr. Osborne was quick to highlight the difficulty an Independent Scotland would face in trying to subsidise these industry tax breaks alone.

“These further downgrades in the tax receipts would leave independent Scots with a shortfall of £1,000 per person," he suggested. 

Image source: Flickr - Berardo62

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