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The Scotsman: North Sea tax change would boost supplies

JANE BRADLEY
([email protected])
7 December 2007

TREASURY officials have proposed a change in rules which could extend the lifespan of North Sea oil fields and generate “millions of barrels” of extra oil.

The plans would see a relaxation of the rules governing tax relief on the cost of winding up the fields at the end of their life – encouraging oil majors to squeeze every last drop out of the sites.

Currently, companies can only claim decommissioning costs against the profits of the last three years – which means many close down the oil fields early, leaving oil still in the ground.

As profitability declines at the end of a field’s life, the last three years’ profits may not be enough to absorb the costs, whereas early decommissioning would allow offset against a healthier profit stream.

The Treasury said the proposals had been drawn up following consultation with the industry.

With the UK now a net importer of oil and gas, the Treasury said the current rules meant big companies did not benefit from remaining in the North Sea and were pulling out of oil fields early.

It said: “As a consequence, this is likely to lead in a number of cases to premature decommissioning.”

Malcolm Webb, chief executive of industry body Oil & Gas UK, welcomed the plans, which are likely to be implemented in next year’s Budget.

He said: “The consultation document is the result of two years’ engagement between government and the UK oil and gas industry. It’s a welcome step in the right direction.

“The changes proposed so far should help to extend the life of many fields and facilitate the transfer of assets. However, we believe the future of the North Sea can only be properly secured by reducing the overall tax burden to ensure investment can be sustained in this mature and challenging province. We look forward to a continued, meaningful engagement with Treasury.”

The trade body’s economics director, Mike Tholen, added: “It will tangibly extend the life of the North Sea. Although it is difficult to put an exact figure on it, it, our research shows there are millions of barrels extra to be recovered.”

North Sea oil and gas production is currently in decline, encouraging the big companies such as Royal Dutch Shell and BP, which developed the province, to shift their focus to more promising areas in Africa and elsewhere.

The government plans to include the proposals were outlined in the paper entitled “Securing a sustainable future: a consultation on the North Sea Fiscal Regime”, in the 2008 Budget.

It said the government was also considering a number of incentives to boost investment in alternative energy sources such as wind farms and to encourage carbon capture and storage (CCS) technology, which involves storing in depleted oil and gas fields.

Industry executives have been frustrated by the government’s failure so far to provide a fiscal framework for CCS. BP has shelved its planned CCS project because of the delays.

OPEC FREEZE SPARKS PRICE RISE
OIL prices climbed more than a $1 a barrel last night following OPEC’s output rollover and as weakness in the dollar propped up commodities. OPEC agreed on Wednesday to keep output restrictions in place, shrugging off calls from consumer nations for more supply to stem sliding stockpiles ahead of winter. And Algeria’s oil minister said yesterday the group could consider cutting back production if the US economy falls into recession.

US crude futures rose $1.09 at $88.58 after dipping as low as $85.82 earlier in the session.

http://business.scotsman.com/utilities.cfm?id=1908282007

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