Budget: Oil and gas
‘Innovative’ energy tax policy welcomed
The measure, which Mr Hammond described as an ‘innovative’ policy, will allow purchasers to claim back a slice of the decommissioning costs and is intended to make the more mature oil and gas fields a more appealing proposition to potential purchasers.
The policy will come into place in 12 months’ time in November 2018 and Mr Hammond said: “It is an innovative tax policy that will encourage new entrants to bring fresh investment to a basin that still holds up to 20 billion barrels of oil.”
Oil and Gas UK has said the move could prolong the life of mature fields by many years and save the Treasury an average of £10million per asset in deferred tax relief.
Andrew Benitz, chief executive of Jersey Oil and Gas, a London-listed firm with North Sea assets, said: “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 address this concern.
“There is plenty of life left in the North Sea yet.”
Ewan MacKinnon, Investment Director at Maven Capital Partners, also welcomed the development, saying it could significantly prolong the life of the sector.
He said: “We welcome these reforms from the Chancellor today as the cost of decommissioning older fields is becoming increasingly troublesome, with current tax rules deterring M&A in the sector.
“It is essential that the right assets are controlled by the appropriate owners to allow for ongoing investment, which could raise up to £40bn in the UK.
“It has been proven time and again companies that specialise in late life assets can be highly successful in buying maturing North Sea fields. For example, Apache’s Forties field is still going strong 15 years after it was acquired from BP.
“The improvements outlined today should attract further investment in the North Sea and prolong the life of the sector for years to come.”
Derek Leith, EY’s Head of Oil and Gas Tax, was equally enthusiastic, saying: “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.
“The proposed changes, the details of which will be worked through in 2018, have the potential to revitalise the UK oil and gas industry. They will enable the current owners of mature producing fields to pass some of the corporate tax history of the current owner to the buyer, thus enabling the buyer to be in broadly the same tax position as the seller.
“This should have the effect of enabling new or recent entrants to the UK Continental Shelf (UKCS) to bid for mature assets which no longer attract investment from their current owners who allocate capital to large projects in less mature basins.
“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.”
Mr Hammond also used the opportunity of his autumn budget to announce a 10% cut in the supplementary charge on UK and UK continental shelf upstream oil and gas activities.
The reduction in the rate of the supplementary charge will have retroactive effect from 1 January 2016.