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Financial Times: Treasury move to aid oil groups

By Ed Crooks, Energy Editor
Published: December 7 2007 03:58 | Last updated: December 7 2007 03:58

North Sea oil and gas companies are to be given new tax breaks to offset the cost of decommissioning old facilities, the Treasury has said.

However, a more general reform of the tax regime for the industry has been put off until the Budget in 2009, with a new round of consultations taking place before next summer.

In spite of oil prices hitting about $90 a barrel, the industry has argued that high costs in the North Sea and the decline of the UK’s oil and gas reserves make the region a difficult area in which to operate. Capital investment this year is believed to be down on last year.

Angela Eagle, the exchequer secretary, said on Thursday the government had introduced the tax breaks to “make sure we are not leaving any oil in the ground that could be recovered”.

“We don’t want tax considerations to be the thing that stops that going on. We want to maximise the life of the UK continental shelf, and benefit the UK taxpayer.”

The biggest companies in the North Sea, such as BP, Royal Dutch Shell and ExxonMobil, have been pulling back from the region, selling their assets to smaller companies that specialise in maximising oil and gas recovery from mature fields.

Although the net effect on revenues will be neutral, Ms Eagle described the changes as a “win-win” that would create an incentive for continued activity and investment.

The biggest change, to be included in next year’s Budget, is to the rules for writing off decommissioning costs against corporation tax.

There are more than 40 installations in the UK sector of the North Sea that were put in during the first wave of investment in the early to mid-1970s, and are now coming to the end of their lives. The total bill for decommissioning the infrastructure of the North Sea has been estimated by the industry at £15bn-£20bn.

Until now, a company was able to write off its decommissioning costs only against the previous three years of tax. So if the field had not been making much money, and if the company had no profits elsewhere in the North Sea to benefit from the tax loss, the gain would be wasted. That created an incentive for companies to shut fields down more quickly, while their profits were still high enough for the tax loss to be used.

In future, the tax loss can be used against profits going back to 2002.

Mike Tholen of Oil & Gas UK, the industry group, welcomed the move, saying: “It makes the system better for the government, and makes life slightly easier for companies operating in the North Sea.”

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